Is the looming threat of tougher mortgage qualification sparking a mad real estate buying rush?
It would appear pending B-20 regulations, which will go into effect on January 1st, are fueling a short-term uptick in sales activity following several months of decline.
Unseasonably strong numbers have been noted by several real estate bodies, including the Canadian Real Estate Association and the Toronto Real Estate Board, who both muse the latest borrower interventions are leading to renewed hustle for Toronto townhouses, condos and detached homes.
“Newly introduced mortgage regulations mean that starting January 1 st, all home buyers applying for a new mortgage will need to pass a stress test to qualify for mortgage financing,” wrote CREA President Andrew Peck in the association’s latest report. “This will likely influence some home buyers to purchase before the stress test comes into effect, especially in Canada’s priciest markets.”
His Chief Economist Gregory Klump, concurs, stating, “National sales momentum is positive heading toward year-end. It remains to be seen whether that momentum can continue once the recently announced stress test takes effect beginning on New Year’s Day.”
A New Sense of Urgency
The new measures will require all low-ratio borrowers to qualify at the higher of either the Bank of Canada’s five-year qualification rate (now 4.99 percent) or their mortgage contract rate plus 2 percent. They also prohibit co-lending arrangements and have increased required loan-to-value ratios. It’s anticipated the test will shave upwards of 20 per cent from buyers’maximum affordability and 10 – 20 percent off home prices.
James Laird, President of mortgage brokerage CanWise Financial, says a household earning $100,000 annually would see their budget shrink by $150,000, assuming a five-year fixed rate of $2.84 percent and 25-year amortization, from $726,145 to $573,791.
Mike Brickell, a mortgage broker at CanWise, says that while the volume of mortgage applications hasn’t dramatically increased, borrowers are more anxious to close quickly. “The deals that are coming in definitely do have a sense of urgency – and once they’re approved, they want to move the closing date even sooner,” he says. He adds that while this may be partly due to the desire to square deals away before the holiday season, “I sense it is to beat the upcoming B-20 rule changes.”
Short-Term Market Confusion
While the rules officially go into effect in 2018, some borrowers are already feeling the squeeze, Bricknell says, as some lenders plan to implement the new requirements sooner.
“There are some lenders who have said that a mortgage approval granted up until December 15th will qualify at the current rules whereas any approval posted after that date will be subject to the new ones,” he says.
A recent 10-basis- point increase to the Bank of Canada’s five-year qualification rate to 4.99 percent has thrown the Toronto real estate market into further flux, casting doubt on some borrowers’ affordability ceilings. “If a qualified maximum mortgage pre-approval was granted before the beginning of November, those the borrowers may have to get re-pre- approved to be sure of their maximum affordable home purchase range to avoid any disappointment,” Bricknell says.
Borrowers Will Turn to Other Options
For those who miss the window of opportunity, options include reducing their buying budgets, receiving a larger gifted down payment, or perhaps adding a co-signer, he adds, though he remains concerned the changes may just prompt previously A-borrowers into the private lending market, where they’ll be subjected to even higher rates.
And, while plenty of experts have expressed concern that OSFI’s new requirements could have a harsher-than-intended impact on the market, one notable expert doubts their long-term effectiveness.
In a research note to investors, CIBC’s Deputy Chief Economist Benjamin Tal said that while the new mortgage rules, in combination with the Ontario Fair Housing Plan, would likely cool the Greater Toronto Area market, the effect would be short-lived, with prices quickly resuming their upward trajectory.
And, while he concurs 10 – 15 percent of all mortgage originations will be affected, the impact on demand will be less than anticipated. “In the past, borrowers have seen tremendous ability to adjust to new situations and we doubt that things will be different this time,” he writes. “The average amortization period in the overall mortgage market has been steadily declining as borrowers took advantage of low rates to accelerate prepayments. With aggregate principal payments now at a record high, many borrowers will have the option of increasing amortization to avoid the sting of higher mortgage rates.”
