The new OSFI B-20 guidelines come into effect at the start of next year. It will require lenders to qualify home buyers for even conventional mortgages (buyers with 20% or more down-payment) at a greater of BOC benchmark rate (4.89%) or contract rate +2% from January 1st 2018. At present, home buyers seeking variable rate and shorter term fixed mortgages (1-3 years) are already required to qualify at the posted rate of 4.89% and only 5 years fixed rates mortgage approvals are exempt from this, but this will change from January 1st 2018.
Let’s look at an example: If you buy a home today for $ 700,000 with a 20% down-payment, you may be qualified for a 5 Years fixed rate of 3.49% on a household income of around $ 120,000 (Gross Debt Servicing – GDS ratio of 32%). However, as of January 1st, the qualification rate will go up by 2% to 5.49%. This will mean that at the same household income of $ 120,000 and with a 20% down-payment, you will only be approved for a property worth $ 560,000! So to buy the same ($ 700,000) property once the new rules are enforced, you either need to increase your income by around 20% (to $ 142,000) or increase your down-payment to 35% ($ 245,000) to qualify.
I think this policy will negatively impact first time home buyers of smaller homes who typically have relatively low household income and limited savings and it will also inhibit purchase and sale of large homes ($1.5M+) due to significantly high income/ financial requirement. My team and I are therefore advising buyers (especially those with “borderline” preapprovals) to obtain their mortgage approval and buy before the deadline. Sellers are also advised to discuss and review their plans with their respective realtors. I do expect increased real estate activity until Dec 20th which is the cut-off date for approval by most banks.
It appears that this guideline as prudent as it may be, seems to decelerate already sluggish GTA‘s real estate market. It may result in slower than desirable market conditions during 2018, putting further downward pressure on home prices as sellers struggle to sell homes in the wake of a reduced number of qualified buyers. However, I do expect lenders to come up with creative solutions/ products to minimize the negative impact of this guideline, whilst ensuring full compliance with its requirements. At a macro level, this may also negatively impact the GTA’s economy and various city revenues. I reckon provincial government may take some action to stimulate the real estate market perhaps latter next year or sooner! Let’s see!
Written By: Riaz Ghani – R.E. Broker
October 26, 2017
Disclaimer: The above blog is just a general guideline. Please take advice from a licensed mortgage professional before making any home buying decision.