The Office of the Superintendent of Financial Institutions (OSFI) announced last week that on June 1, the qualifying rate would drop from 4.79% to 5.25% for uninsured mortgages.
Much ink has since been written on the subject, but the impact of this change will go largely unnoticed.
In a context where the real estate market is overheating, we immediately believe that this is an attempt to calm things down. But when we think about it, it’s hard to see how this tightening of the rules can ease the current frenzy.
Yes, yes, the increase in the qualification rate will affect people, but not those we think.
A safety margin
This framework measure has only been in existence for 5 years (the duration of a mortgage term). The principle is not rocket science. When you are granted a mortgage, you pretend the interest rate is higher than the one you are granted. This way, we make sure that you will still be able to repay the loan if the rates start to rise.
Before 2016, a safety margin was applied more or less informally, with more or less severity, depending on the lenders. When OSFI standardized and enforced this practice, it hit the nail on the head. Since then, she has made adjustments, but as we can see, this has not helped contain all the excesses.
The change announced last week affects uninsured mortgages (called “conventional”), the qualification rate drops from 4.79% to 5.25%, which reduces the borrowing capacity.
But now, almost all new mortgages are insured. It is true that the first buyers who arrive with 20% down payment are not obliged to pay a premium to CMHC, but the lenders will nevertheless insure these debts at their expense (I spare you the reasons, it is another subject).
In short, the first buyers are in no way affected by the increase in the qualification rate, nor are the 2nd and 3rd buyers who arrive with large down payments. But who is concerned?
Mortgage refinancing
Essentially, it is homeowners who want to “remortgage” their homes that will be affected. And not all!
When you want to free up money from a partially paid house, you have to go through refinancing. The operation allows for example to make a down payment on a chalet, to renovate its kitchen, to buy a recreational vehicle (RV), to consolidate its debts … or, as the legend wants it, to launch the career. by Céline Dion.
However, in a refinancing operation, the mortgage loan is not insurable.
“I calculated that the people concerned would see their borrowing capacity [sur leur propre maison] reduced by approximately 4.5%, ”says Denis Doucet, spokesperson for the mortgage broker Multi-Prêts. Homeowners who apply for refinancing in order to access a home equity line of credit are not affected, according to the expert, “because they are already subject to a higher qualification rate, around 5.30%”. The tightening announced by OSFI will not stop the bidding on houses for sale, but it could (barely) reduce the enthusiasm of renovators, already dampened by increases in the price of materials.
To improve your chances of qualifying
- Insured mortgages are also subject to a qualifying rate, unchanged at 4.79%. These rules mean that in Canada, poor quality mortgages (subprime) are much less numerous than in the United States.
- The Canadian mortgage market is well regulated, which largely protects us from the abuses we saw in the United States a dozen years ago.
Let us recall some tips to facilitate qualification:
- Reduce your debts (or not increase them) before you apply for a mortgage.
- Make a larger down payment.
- Buy together.
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