The nation’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), issued the final version of Guideline B-20 on October 17. While the new rules are designed to ensure that homebuyers in the uninsured mortgage market can withstand rising interest rates, some industry sources say it contains a loophole that lenders could exploit to qualify more mortgages.The finalized guidelines would force low-ratio borrowers to qualify based on either the Bank of Canada five-year posted rate or two percentage points above their contract. Both measures mean that consumers should qualify for smaller loans.
However, mortgage experts are now pointing out that OSFI failed to regulate the length of the amortization used in the qualifying calculation, which involves ensuring that only a certain percentage of the borrower’s monthly household income would be dedicated to housing costs.
An extended amortization period reduces the monthly payment at a given interest rate. This means loan providers could extend amortizations from 25 years to 35 years, potentially creating a smaller monthly payment that would qualify more homebuyers.
“You can increase the amortization and clearly you can go longer,” a source told the Financial Post. But the source did not expect the major banks to take advantage of the loophole. “This was done to release some of the pressure [from increased stress testing].”
The real estate industry has been lobbying for some last-minute changes to Guideline B-20, and the financial regulator said it has received more than 200 submissions from federally regulated financial institutions, financial industry associations, and other organizations active in the mortgage market. The general public has also submitted their petitions.
A report from Toronto-Dominion Bank said OSFI’s stress test will likely further slow housing market activity, dampening demand by 5% to 10% once implemented on January 1, 2018.
With the Canada Revenue Agency (CRA) saying it will ramp up efforts to find tax evaders who earn money by flipping condos while they’re still being built, British Columbia and Ontario’s finance ministers said they are open to the idea of a land registry of pre-construction condo sales.
Charles Sousa, Ontario’s Minister of Finance, said the federal government wants the CRA to enforce the disclosure of assignment sales (also known as shadow flipping). Buyers who engage in this practice purchase condos from developers and sell them to other buyers before they’re completed. The government’s aim is to prevent tax avoidance of any capital gains.
Carole James, BC’s Minister of Finance, said her government has made some changes to make it easier to share information with the federal government, and is also looking into ways it can assist Ottawa in its investigation and audits.
James said the BC government is considering the creation of a registry of condo presales and assignment sales. However, she stressed that this was just one of the many possible options.
Sousa said he’s supportive of any measure, including a land registry, as long as it ensures full disclosure.
The CRA is analyzing 2,810 transactions involving pre-construction condo flipping in Toronto and could carry out audits to identify tax evaders. The federal agency said real estate deals in Toronto and Vancouver have been the subject of greater scrutiny.
OSFI is reinforcing a strong and prudent regulatory regime for residential mortgage underwriting News Release
Do you have at least 20-per-cent home equity and need a new mortgage? Are your housing costs more than a third of your gross income?
If you answered yes and yes, then Jan. 1, 2018, is a date you should mark on your calendar.
That's when our banking regulator's new mortgage stress test officially kicks in. And if you meet the criteria above, you may not qualify for as big a mortgage next year as you do today.
Story continues below advertisement
But you may have even less time than that.
The Office of the Superintendent of Financial Institutions (OSFI) tells us that "approved loan applications occurring between October 17, 2017 and January 1, 2018 might be subject to the new rules, depending on the institution. This is because … where possible, institutions are encouraged to comply with the new rules as soon as they can."
So far, I'm not aware of any big lenders imposing the new stress test. But you can bet that some will, starting as early as next month or December.
This means two things if you have above-average debt ratios and apply too late: your choice of lenders will shrink, and it's less likely you'll get the best rate and terms.
Now, none of this is intended to create a misleading sense of urgency. For one thing, if you have higher debt ratios, maybe you shouldn't be buying a home that increases your debt load further. You may also find cheaper home prices in the new year if the new OSFI rules depress home-buying demand, as many expect.
For homeowners swimming in debt, however, the urgency is more real. If folks can't use their home equity to easily consolidate high-interest debt, they could be facing a painful interest-cost burden or even insolvency. For these people, their best shot at getting great mortgage rates and terms may be in the next month or so.
Either way, higher debt-ratio borrowers will still be able to find lenders to approve them, even after Jan. 1. That's because most provincially regulated lenders are not bound by the OSFI's new rules.
Story continues below advertisement
Story continues below advertisement
But beware the cost. Lenders aren't dumb. If they know you're a more heavily indebted borrower who can't qualify at a bank, they're going to make you pay. They'll charge a rate premium for the privilege of borrowing with more flexibility. That could add anywhere from 0.10 to 1.00-plus percentage points to your rate. It's called "risk-based pricing," a popular catchphrase in the mortgage industry.
Here are more tidbits of note for home buyers:
You never know how you’ll react in an emergency situation until it happens. That’s why planning an emergency escape route in your home is important for safety. Although we hope the situation never arises, you can easily become prepared for any home emergency, be it fire, flood, earthquake, or risk of electrocution with the tips below.
Start by drawing a floor plan
Do you have children or grandchildren who sleep over? It’s important to get kids involved in the plan. A fun way to do this is to have them draw the floor plan. It will also help them learn the plan. Using markers or pencil crayons, have them start by drawing the outline of your home and highlighting all the doors and windows.
Walk through your escape plan
Visit each room. Inspect all of the potential exits and escape routes. Make sure the windows open and that the doors close. Look at how your rooms are set up. If there is a fire, could that big chest of drawers be blocking the window? Are the electrical outlets being used properly? It’s important for everyone to know that closed doors can slow the spread of smoke, heat, and fire.
Pick a place to meet outside your home
Pick a location a safe distance from your home where everyone can meet in the event of an emergency. Mark the location on your escape plan. While you’re outside, be sure to check that your house or building number can be seen from the street so that emergency vehicles will be able to find your home. Learn your relevant emergency phone numbers (the local pizzeria doesn’t count).
Practice your emergency escape plan
It’s time to walk everyone through the plan so they understand it. Don’t forget the pets! They may not be able to learn it, but thinking about their safety will help you sleep better at night. Then, practice your escape plan at least twice a year so you’re ready to use it should you need too. A great time to do this is when we change the clocks ahead and back and replace fire alarm batteries.
Test your knowledge
Pop quiz. With your eyes shut, do you know the locations of all your emergency exits? Do you know the locations of your smoke detectors? Most of us don’t. Check with your provincial government to identify where smoke and carbon dioxide alarms should be placed and then mark them all on your plan. Be sure to mark fire extinguishers too. Bonus points if you have a security system with a monitored fire alarm.
Check in with your insurance agent
Did you know that your home’s replacement value can change over time? This is caused mainly by renovations that increase the value of your home, making it more costly to rebuild. That’s why it’s important to talk with your insurance agent prior to and after any home renovations to make sure you have the right coverage to protect you, your home, and its contents.
It’s finally time for that home renovation. You’ve been dreaming about chef’s kitchens, spa baths and extra space for living in. Now you’re itching to bring your Pinterest®-perfect dreams to life. We don’t want to throw a wrench into things, but before you hit up a contractor, you might want to hit the pause button. Many people assume that during a reno their home will be covered under their existing home insurance policy, but that isn’t always the case. Here are the steps you should take before you get started.
Get a vacancy permit
That big addition you have planned could mean you’ll have to move out for 30 days or even longer. If that’s the case, you may need to check with your insurance broker to make sure that you’re covered with a vacancy permit. Without one, you could be violating your policy.
Cover your bases
While your house is under construction, it could be vulnerable to damage, burglary or fire – especially if you’re not living in it. If you’re having a second or third floor added, you need to make sure the proper tarping is in place to help protect your home against the whims of Mother Nature. Ask your insurance broker to look at your policy to determine what other changes need to be made to give you the best coverage during your reno.
If it’s worth more, you need more
A big addition, extra bathroom or luxe kitchen can increase the value of your home. Keep your broker in the loop. You want to make sure your finished home is insured for its increased value.
Tip: Keep all your construction receipts. Should anything happen, you want to be able to prove that the 31 handles on the kitchen cabinets really cost $45 each.
Make sure your contractor is covered
It’s human nature to hope for the best. But accidents can happen… especially on a construction site. Make sure your contractor has appropriate insurance coverage. Click here to read more about contractor’s insurance and worker’s compensation.
Good luck with your project. Whether you’re using a contractor or doing a DIY, enjoy the process. Save your stress for picking out paint colours. With so many questions and decisions on the table, making sure you’re covered doesn’t have to be one of them.