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.
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.
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:
- Existing mortgage applications: If you’ve received approval for a mortgage already, the new rules won’t affect your mortgage, regardless of when it closes.
- Preapprovals: Banks should honour existing preapprovals issued under the old rules until those preapprovals expire. For preapprovals issued between Oct. 17 and Dec. 31, 2017, the lender can choose which rules to apply (unless they’ve implemented the new stress test prior to the deadline). The OSFI suggests confirming the conditions of your preapproval with your lender, just to be safe.
- Applications in the new year: The OSFI states that if you get a mortgage from a federally regulated lender such as a bank, then all “loan applications or pre-approvals occurring after January 1, 2018, will be subject to the new rules.” There are no exceptions, even if you signed your purchase agreement before the new rules were announced.
This last point could be an unpleasant surprise for borrowers who relied on the old mortgage-qualifying rules to buy a property closing after December and have not applied for a mortgage before the new rules kick in: Unless the OSFI creates an exception for such cases (don't hold your breath), some of these buyers will have to seek higher-cost non-bank financing in order to close.