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New Mortgage Qualification Rules Temper Housing Demand

Vancouver, BC – March 14, 2018The British Columbia Real Estate Association (BCREA) reports that a total of 6,206 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in February, a 5.7 per cent decrease from the same period last year. The average MLS® residential price in BC was $748,327, up 8.8 per cent from the previous year. Total sales dollar volume was $4.64 billion, a 2.6 per cent increase from February 2017.

“More stringent mortgage qualification rules for conventional borrowers are dampening housing demand in the province,” said Cameron Muir, BCREA Chief Economist. “Since the new rules came into effect, BC home sales have fallen more than 26 per cent, on a seasonally adjusted basis.”

Previous mortgage policy tightening has negatively impacted housing demand for a period of four to seven months, with the largest impact occurring in the third month after implementation.

Year-to-date, BC residential sales dollar volume was up 15.9 per cent to $8.47 billion, compared with the same period in 2017. Residential unit sales increased 4.1 per cent to 11,516 units, while the average MLS® residential price was up 11.3 per cent to $735,755.

I asked Shelagh Green about the changes recently and here is what she had to say

"The newest rule change took effect January 1st, 2018, the ‘Stress Test’, for Conventional Financing, this is for those who are putting 20% or more as a down payment, or Refinancing with 20% Equity in their home.  ie: the client takes a 5 yr. Fixed Rate, the Contract or Discounted Rate is 3.39%, they must qualify at 2% over that rate or 5.39%, their actual payments are calculated on 3.39%, but the qualifying payment on the application is calculated on 5.39%.  On a Home Equity Line of Credit, our product is called an RBC Homeline Plan, where the client can have a fixed or variable term Mortgage component, and or all of the funds in a Line of Credit component, they must qualify at 2% over the Line of Credit Rate within our Homeline Plan, which is currently 3.95%, therefore the qualifying rate is 5.95%.

The Office of the Superintendent of Financial Institutions (OSFI) announced the following new regulations effective January 1, 2018.
  • When qualifying clients, federally-regulated financial institutions (FRFIs) will be required to approve conventional or uninsured residential mortgages at the greater of the contract rate plus 2% or the 5-year benchmark rate published by the Bank of Canada. This change applies to conventional / uninsured mortgages only.
  • The government’s objective is to slow the housing market and ensure long term stability. As a result, all potential home buyers will need to prove they could still afford their mortgage payments if interest rates were 2 per cent higher than the rate they negotiate.
Since October 2016 High Ratio or Default Insured Mortgages, clients putting down less than 20%, (CMHC, Genworth, Canada Guaranty) must qualify at the Qualifying Rate/or 5 Yr. Posted Rate, currently 5.14%, but their payments are based on their Contract Rate ie. 3.39% on a 5 yr. Fixed, 3.29% on a 4 yr. Fixed.
These changes have certainly had some effect on what client’s will qualify for in a mortgage amount.  As January & February historically is a slower market in the Interior, I don’t believe that we will really see how big of an effect these changes will have until March April.  I am telling my clients, they must get Pre-Approved, even if they are Selling and Re-Purchasing, and Porting their Mortgage, as they must qualify under the new rules."

In addition, Kelly Rowe of Lending Max had this to add:
"I'm seeing the effects of these new rules as do my colleagues. It isn't really a positive one, but I don't think it is the end of the world either. It seems the insured mortgages are not going to be overly impacted
as those rules have been in place for about 18 months now.

The impact there is now is coming from the rising interest rates.
The conventional mortgages are going to be where these rates and rules will have the biggest impact of course. I think we'll see the market
level out perhaps in the bigger centres and we may see an increase in the smaller outlying areas where homes are still more affordable.
It's a bit of a crap shoot predicting, but there's my thoughts."
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