This is how OSFI’s new mortgage rules will affect Canadian homebuyers

Canada’s banking regulator unveiled tougher mortgage rules Tuesday, saying that even homebuyers with down payments of 20% or more will have to prove they can afford higher interest rates.

The Office of the Superintendent of Financial Institutions Canada (OSFI) says that buyers who who apply for uninsured mortgages — those with a 20% down payment or more, or those buying homes worth $1 million or more — will be stress tested to show they can afford a mortgage, either at the five-year average posted rate, or two percentage points higher than the rate their bank or broker offers them (whichever one is higher). The new rules go into effect Jan. 1, 2018. 

Here's an example of how the new rule changes will impact homebuyers. On our website, the current lowest variable five-year mortgage rate available in Ontario is 1.99%. A couple buying a home for $500,000 with a $125,000 down payment would be paying $1,743 a month at that rate (according to our mortgage calculator).

However, under the new rules, that same couple will be stress tested prior to qualifying to ensure they can pay the mortgage at two percentage points higher — 3.99%. That means they must be able to show they can afford to pay a mortgage of $2,165 a month.

That's a difference of $422 a month, or $5,064 a year.

Earlier this month, OSFI announced that it would be introducing a similar policy targeting homebuyers with mortgage insurance — people whose down payment is less than 20% — in an attempt to reduce Canada’s exposure to mortgage defaults. Before qualifying for a mortgage, homebuyers would have to show they could still service their monthly payments even if it increased by two percentage points.

The new rules appear to be aimed at taming Canada’s overheated real estate markets. In Toronto, evidence is mounting that the factors that caused home prices to skyrocket between 2010 and 2016 weren’t actually rooted in market fundamentals.

Population levels, incomes, and borrowing costs accounted for less than half of the 40% surge in home prices versus 75% in Vancouver — the city previously believed to be the poster child of investor speculation run amok — a study from Canada Mortgage & Housing Corp. found.

Some criticise the new rules for being too constrictive. The Fraser Institute, a Vancouver-based think tank that lobbies for limited government regulation, said the rules could trigger more instability in the housing market. According to its analysis, many prospective homebuyers wouldn’t be able to access mortgages and would have to turn to private lenders who charge higher interest rates — despite the fact that Canadians historically have a good track record for keeping their debts current and eventually paying them off.

According to OSFI, the changes were introduced to reinforce the expectation that “mortgage lenders remain vigilant in their mortgage underwriting practices.”