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Tougher Rules And Higher Rates: What’s Next For The Mortgage Market?

The rate increase itself is not the issue. It's a combination of everything at once.

07/17/2017 09:46 EDT | Updated 07/17/2017 12:57 EDT
Mark Blinch / Reuters
Houses back onto a park in Vaughan, a suburb with an active real estate market, in Toronto, Canada, May 24, 2017.

It all began last October, when federal Finance Minister Bill Morneau announced several new regulations aimed at ensuring that Canadian borrowers only take on mortgages they can afford, including enforcing that all insured borrowers qualify for loans based on the five-year posted mortgage rate.

These regulations were meant to slowly decrease prices as people were having trouble affording homes in "hot markets." The regulations essentially caused the long-running seller's market to slowly become more of a buyer's market – or at least that's where we thought things were headed.

Next came the changes in April.

On April 20, the Ontario government introduced the Ontario's Fair Housing Plan, 16 measures designed to further improve affordability. These were less welcome to say the least, and have already caused some major interference in the housing cycle.

On top of all this, Governor Stephen Poloz has lifted the benchmark overnight rate to 0.75 per cent from 0.5 per cent, which will only add more fear and confusion - and may slow things down further.

The rate increase itself is not the issue. It's a combination of everything at once. There is simply too much going on and too many measures for buyers to digest, causing them to put off purchasing a home altogether. We have already seen an increase in the number of buyers walking away from their deposit.

Many buyers are also waiting too long before getting their purchase and sale /offer off to their lender or broker. This is not only harmful, but it will also cause a ripple effect if the transaction does not close. The longer a homeowner waits to get an approval, the greater chance the appraised value will not match the purchase price.

Basically, people are really struggling to understand the new rules, further perpetuating the confusion — and fear — of buying a home.

If all of this wasn't already enough, last week the Office of the Superintendent of Financial Institutions (OSFI) announced that it is considering requiring lenders to 'stress test' uninsured mortgages.

These measures would be more specifically aimed at those who have 'over-borrowed' in the uninsured mortgage market. The regulations would require a stress test to qualify for an uninsured mortgage, and would make the qualifying rate for these mortgages the contract rate plus two percentage points.

Right now, there is a loop hole on the alternative side of lending, so the understanding is there as to why OSFI was looking to impose this new measure. We saw it right away. Alternative lenders do not have to use the stress test rate to qualify homebuyers or owners. However, this does not mean that there needs to be a stress test rate either. Alternative lenders rates are already 100-200 basis points above the current fixed rate and their mortgages are not insured by CMHC.

Unfortunately, it's not up to us, it's up to OSFI. For now, thankfully, OSFI has decided to hold back on these new measures.

I said it before and I'll say it again, this is way too much too soon.

If OSFI chooses to impose this "2% stress test rate" on top of the banks posted rate in the near future, it will have a huge impact on self-employed homebuyers and homeowners who need to refinance.

People with bad credit who own a home may no longer be able to renew or refinance, meaning they may be stuck on the alternative side or forced to sell.

What seems even more unfair, is that self-employed homeowners and buyers would also fall into this bracket. I could understand the blemished credit category, but not self-employed people with good credit. It just doesn't make sense, and it's safe to say there will be a lot of implications – and a lot of unhappy people.

Whether or not OSFI decides to implement these new policies, the fact of the matter is that the current regulations and the rate increase are here to stay and we simply need to adjust. However, it's going to take some time.

I said it before and I'll say it again, this is way too much too soon.

Ultimately, your best bet as a homeowner or prospective buyer/seller is to try and inform yourself and/or ask questions when it comes to the changes in regulations before trying to purchase, sell or refinance your home.

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