Interest Rate Boost, Stricter Rules Become “Perfect Storm” for Canadian Mortgage Borrowers
Buying a home in Canada becomes much harder because of the expected higher lending rates for mortgage borrowers. The most recent tightening of mortgage rules is just the beginning of another round of stricter guidelines are already in the planning stage. The trend could further press downward house prices, especially in Vancouver and Toronto. The two cities have recently high marks in the housing markets but are now displaying signs of cooling down.
The banking regulator of Canada, the Office of the Superintendent of Financial Institution or OSFI, made a proposal that requires a stress test particularly on mortgages that are uninsured. The proposed test specifically applies to mortgages where buyers have made 20% or higher down payment.
The new rules state that borrowers must first comply with the qualification showing that they pass a higher rate than their contract rate or at rate two percentage points. The rules apply to HELOCs or Home Equity Lines of Credit and other traditional mortgages.
The move of the federal Liberals requiring insured mortgages a “stress test” was carried out last fall, particularly for those that have less than 20% down. Borrowers are required to qualify at the posted rate of the Bank of Canada that is currently at 4.64% or approximately 2 percentage points on top of the offered rates. The moves of the provincial governments take precedence especially in cooling off the fast increasing house prices.
The 15% tax imposed on foreign buyers in British Columbia is deemed one of the reasons why the housing market in the area cooled down. A similar tax in Ontario was introduced in April and is considered the reason that hampered the growth of house prices in Toronto.
RateSpy.com founder, Rob McLister, estimated that the new proposed rule implicates that borrowers could afford 18% less mortgage compared to when the rules were changed. This will have an important effect on the Vancouver markets and the Greater Toronto Areas if adopted. These markets recently have non-insured borrowers as the dominating variables according to a Financial Post interview with Doug Porter, Chief Economist of the Bank of Montreal.
Putting an End to the Debt Trend
Among G7 countries, the growing debt load is highest in the Canadian households and this is where the stricter mortgage rules are applied. Geneva’s Bank for International Settlements and the Parliamentary Budget Office of Ottawa are diverse organizations that warned an increased risk of the debt phenomenon that Canada would face in case lending costs also rise. The stress test intends to ensure that borrowers could still make their payments even with higher interest rates.
Mortgage Rates Increased Before Hike in Bank of Canada
Lenders are now raising their mortgage rates even before the Bank of Canada announces their interest rate increase. Other banks including the Royal Bank of Canada, Bank of Montreal, and CIBC also imposed a fixed-rate mortgage hike last week.
There is a confirmed 0.2% hike in the percentage points of BMO and RBC lending rates based on news reports. RBC announces their 2.84% 5-year fixed-rate mortgage that will not exceed 25 years while BMO has 2.79% or 2.89% lending rates. CIBC increased 0.05 to 0.15 mortgage rates percentage points according to a CBC News spokesperson.
The trend is part of the expectation of the rate increase of the BoC, which most analysts are predicting would take place either on the 12th of July or October at the latest.
Stephen Poloz, Governor of the Bank of Canada, increasingly uses strong language in stressing that the period of a low-interest rate is slowly coming to an end. The combination of the trends of rising rates and more stringent and difficult mortgage rules results in the mortgage market’s experience of a “perfect storm” according to McLister in his Globe and Mail column.
He reiterated that Canada encounters overvaluation in its significant and huge markets along with the major strict mortgage rules and over-indebted consumers and the pending rising rates. He added that the Canadian housing market is quite unpredictable, making it almost foolish to confidently make presumptions. McLister advised not to feel rushed when buying and that there is far less risk if you wait for your dream home, which most likely would be “on sale” this fall.