The Office of the Superintendent of Financial Institutions (OFSI) has introduced new mortgage rules that will be in full effect as of January 1st, 2018. These regulations set a new qualifying rate or “stress test”, which will reduce buyer power and affordability. Essentially, if you qualify for a mortgage now at 2.89%, they’ll add 2% so you’ll have to qualify at 4.89%.
OFSI is adding those 2 extra points because they’ve forecasted that’s what the rates might be in 2 years according to the President of the London and St.Thomas Association of Realtors, Jim Smith.
What does this mean?
Smith gives the example of a family with an annual income of $100,000. At the current rates, they can afford a home worth $726,900 based on a 5-year fixed rate mortgage of 2.8% amortized over 25 years. He says that after January 1st, these people will be able to afford a home of $570,000, dropping almost $200,000 of affordability.
This may sound concerning, however Smith says, “it also guarantees that they’ll be able to afford this house should the rates go to that price”.
Why the change?
These new rules are proactive thinking and movement to avoid Canada from getting into hot water like our neighbours to the South, says Smith.
In 2007, the United States experienced a nation-wide meltdown which the subprime mortgage crisis contributed to. Before the financial hit, credit was easily available and people were spending beyond their means.
“There was no stress test back then”, Smith explains, “If you had a job, you got all that stuff, they didn’t require much of a down payment and that’s why it resulted in the meltdown of 2007”.
Bill 20 is another fiscal policy geared to combat these financial storms that most of the Western world has experienced.
Smith says that, “the bottom line is, if you don’t qualify for it then you shouldn’t be buying a house.” He explains that it sounds harsh and he still encourages people to purchase homes, however you have to be able to pay for it and afford it.
How will London’s market react?
President of LSTAR, Jim Smith believes that London’s market will be okay, and he doesn’t expect it to cool down too much compared to major markets like Toronto or Vancouver.
London is coming off of it’s best year in real estate to date. This year saw chart topping months that broke every record since they began tracking in 1974.
“This is just me, but even the analysts we’ve been listening to for the last few months, they say that it’s gonna be another strong year next year”. According to Smith, we’re in a very strong economy, especially here in London.
The new bill will affect all parties involved in the market. Smith says there’s a trickle down effect when policies like this are established.
Sellers may hold off on putting their homes on the market. The local economy could see a change if people choose to not make upgrades in their homes. However, Smith reassures Londoners that they’re looking forward to another successful year.
Advice for concerned people
If you’re planning to make a move, Smith urges you to contact a realtor and let them guide you towards getting a preapproval for the month of December. If not, you will be going into the new year having to pass this new stress test.
“We’re trained professionals and there to look out for your best interest.”- Smith
