New mortgage rules could disqualify 10% of buyers with big down payments: Bank of Canada

Monday Dec 18th, 2017


New rules coming in January could disqualify up to 10 per cent of prospective home buyers who have down payments of 20 per cent or more, the Bank of Canada says.

The new rules will likely cause those buyers to settle for smaller homes, put more money down or delay buying. Some may also take out riskier loans from alternative lenders that are not federally regulated, including credit unions and private mortgage lenders, the central bank said on Tuesday in its twice-yearly review of the financial system.

The change will require those applicants to prove they could still afford their mortgage payments if interest rates were raised two percentage points, a procedure called a stress test.


The restrictions would affect about $15-billion a year in new borrowing, particularly in Toronto and Vancouver – markets that have had the steepest run-up in prices in recent years. The tighter rules could disqualify as many as 12 per cent of borrowers in the two cities, which account for half the value of homes sold in Canada.

Stress tests are already mandatory for mortgages in which the down payment is less than 20 per cent. The federal Office of the Superintendent of Financial Institutions announced in October that it will extend the tests to mortgages that have down payments of 20 per cent or more of the purchase price – known as low-ratio mortgages – to make sure the borrowers can cope with higher interest rates.


The Bank of Canada expects the impact to be less severe than changes made in 2016 that raised the cost of high-ratio insured mortgages, for which borrowers put down less than 20 per cent. The bank's 10-per-cent figure represents the share of low-ratio mortgages issued in the 12 months ending in June, 2017, that would not have qualified under the stress test. The impact is higher in Toronto and Vancouver because such mortgages make up a larger share of those markets and prices are higher.

"The new rule will have some impact, but it is unlikely to derail the housing market on its own," Bank of Montreal economist Benjamin Reitzes said. "We'll need higher rates for that."

The stress test could eat into the buying power of the most-stretched borrowers by up to 15 per cent, Mr. Reitzes said in a research note.

Tim Hudak, CEO of the Ontario Real Estate Association, said the OSFI rule change and other recent housing-policy measures will be hard on buyers.

"The cumulative amount of government intervention in the housing market means that many people will no longer be able to buy their first home or upsize when the kids come along," Mr. Hudak said. "The piling on of federal, provincial and local government interference risks not only hurting aspiring homeowners, but damaging the broader economy when fewer homes are purchased, furnished and renovated."

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