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Wednesday, October 18, 2017
Yesterday the OSFI, Canada’s top banking regulator, announced changes to rules affecting Canadian mortgages. The new rules will be implemented in January 2018 and will require homebuyers to qualify for a mortgage based on a higher mortgage interest rate than the rate they plan to pay. The new rules are estimated by Toronto-Dominion Bank to impact at least 5-10% of homebuyers.
Most buyers in Canada do not have the amount of money required to purchase a home and require a mortgage loan (mortgage for short) for the purchase. A mortgage is linked the value of the home and used as security by lenders in cases of mortgage default. Financial institutions provide mortgages to buyers who qualify for mortgages based on mortgage rules that the OSFI defines.
When a person applies to obtain a mortgage from a regulated financial institution, their income is assessed to gauge the ability of the borrower to repay the amount the institution lends. The borrower’s income is one of the financial resources a financial institution must verify. Financial institutions also check to see that the borrower does not take on more than 32% of their income for mortgage payments, allowing the rest to be spent for other necessities, such as food, transportation, taxes, etc.
Mortgage payments are calculated using the amount of capital borrowed, the mortgage interest rate , and the amortization. The capital is the amount of money the borrower requires. The amortization is the number of years required to pay off the amount owing, normally 25-30 years. Interest rates in Canada are expected to rise. The higher the rate the higher the payment.
Home prices in many cities in Canada, especially those in Vancouver and Toronto, have been escalating precipitously in recent years. The reason for the tightening of the rules is to protect Canada from mass mortgage defaults as those that occurred in the United States during the financial meltdown of 2007.
The most expensive housing market in Canada is located in Vancouver, British Columbia. The British Columbia provincial government attempted to cool down home prices by enacting legislation in August of 2016 that amongst other measures implemented a fifteen percent tax on foreign buyers. Foreign buyers have been blamed for the rapid increase in home costs.
Toronto, Ontario is the second most expensive housing market in Canada. The government of Ontario followed in the footsteps of British Columbia and tried to cool down the housing market and also introduced legislation, including a foreign buyer’s tax, in April 2017.