Bank of Canada Interest Rate Announcement - May 29, 2019
The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the slowdown over the past two quarters was temporary and growth should pick up beginning in the second quarter of 2019. On inflation, the Bank expects that both total CPI and core inflation will remain near its 2 per cent target in coming months. Overall, the Bank judges its current level of monetary accommodation as appropriate.
Slow growth in the first half of 2019, the result of reductions in Alberta oil production, global trade uncertainty and the continued impacts of the B20 stress test, has likely pushed out any possibility of further tightening by the Bank of Canada into next year at the earliest. In fact, if financial markets are to be believed, the Bank may have missed its chance to return its policy rate to its preferred or "neutral" level and the next move may even be a rate cut. Canadian mortgage rates have responded strongly to revised market expectations for Canadian monetary policy, with 5-year mortgage rates falling back to 2017 levels. Those lower rates are already providing a boost to sales in May and should continue to do so through the summer.
The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the slowdown over the past two quarters was temporary and growth should pick up beginning in the second quarter of 2019. On inflation, the Bank expects that both total CPI and core inflation will remain near its 2 per cent target in coming months. Overall, the Bank judges its current level of monetary accommodation as appropriate.
Slow growth in the first half of 2019, the result of reductions in Alberta oil production, global trade uncertainty and the continued impacts of the B20 stress test, has likely pushed out any possibility of further tightening by the Bank of Canada into next year at the earliest. In fact, if financial markets are to be believed, the Bank may have missed its chance to return its policy rate to its preferred or "neutral" level and the next move may even be a rate cut. Canadian mortgage rates have responded strongly to revised market expectations for Canadian monetary policy, with 5-year mortgage rates falling back to 2017 levels. Those lower rates are already providing a boost to sales in May and should continue to do so through the summer.
Canadian Housing Starts - May 8, 2019
Canadian housing starts increased 23 per cent on a monthly basis in April to 235,460 units at a seasonally adjusted annual rate (SAAR). The trend in Canadian housing starts was up, averaging 206,000 units SAAR over the past six months.
In BC, total housing starts were down 51 per cent on a monthly basis to 49,200 units SAAR. Total starts were up 26 per cent compared to April of last year. On a monthly basis, starts of multiple units were up 63 per cent to 41,000 units SAAR while single detached starts rose 11 per cent to 8,150 units SAAR.
Looking at census metropolitan areas (CMA) in BC:
Canadian housing starts increased 23 per cent on a monthly basis in April to 235,460 units at a seasonally adjusted annual rate (SAAR). The trend in Canadian housing starts was up, averaging 206,000 units SAAR over the past six months.
In BC, total housing starts were down 51 per cent on a monthly basis to 49,200 units SAAR. Total starts were up 26 per cent compared to April of last year. On a monthly basis, starts of multiple units were up 63 per cent to 41,000 units SAAR while single detached starts rose 11 per cent to 8,150 units SAAR.
Looking at census metropolitan areas (CMA) in BC:
- Total starts in the Vancouver CMA were up 63 per cent on a monthly basis in April at 34,200 units SAAR as multiple unit starts jumped 75 per cent from March Compared to April 2018, total starts in Vancouver were up 46 per cent.
- In the Victoria CMA, housing starts more than doubled on a monthly basis to 5,305 units SAAR, mostly due to a spike in multiple unit starts. New home construction was up 66 per cent year-over-year.
- Total starts in the Kelowna CMA increased 30 per cent on a monthly basis, though were still relatively low at just 760 units SAAR. Year-over-year, total starts were down 82 per cent as inventory of unsold units accumulate, constraining further new construction projects. This is precisely the risk we outlined when the provincial speculation tax was introduced.
- Housing starts in the Abbotsford-Mission CMA were down 46 per cent in April at just under 1000 units SAAR. However, on a year-over-year basis, new home construction was up more than double due to strong multiple unit starts.
Canadian Retail Sales - April 18, 2019
Canadian retail sales rose in February after posting three consecutive monthly declines. Retail spending increased 0.8 per cent to $50.6 billion as 5 of 11 retail sub-sectors representing 73 per cent of the retail sector reported higher sales. In BC, retail sales declined 1.9 per cent on a monthly basis, largely the result of declining sales at new car dealers, though sales at building material and garden equipment suppliers was also down, a product of lower home sales in the province. On a year-over-year basis, BC retail sales were flat.
Given all available data for the first quarter of 2019, we are currently tracking Canadian economic growth at about 1.5 per cent. That's compared to just 0.4 per cent growth in the previous quarter but still below estimates of long-run trend growth.
Canadian retail sales rose in February after posting three consecutive monthly declines. Retail spending increased 0.8 per cent to $50.6 billion as 5 of 11 retail sub-sectors representing 73 per cent of the retail sector reported higher sales. In BC, retail sales declined 1.9 per cent on a monthly basis, largely the result of declining sales at new car dealers, though sales at building material and garden equipment suppliers was also down, a product of lower home sales in the province. On a year-over-year basis, BC retail sales were flat.
Given all available data for the first quarter of 2019, we are currently tracking Canadian economic growth at about 1.5 per cent. That's compared to just 0.4 per cent growth in the previous quarter but still below estimates of long-run trend growth.
Canadian Housing Starts - April 8, 2019
Canadian housing starts increased 16 per cent on a monthly basis in March to 192,527 units at a seasonally adjusted annual rate (SAAR). The trend in Canadian housing starts was essentially unchanged, averaging 202,000 units SAAR over the past six months.
In BC, total housing starts were down 10 per cent on a monthly basis to 32,493 units SAAR. Total starts were down 31 per cent compared to March of last year. On a monthly basis, starts of multiple units were down 14 per cent to 25,196 units SAAR while single detached starts rose 7 per cent to 7,297 units SAAR.
Looking at census metropolitan areas (CMA) in BC:
- Total starts in the Vancouver CMA were down 16 per cent on a monthly basis in March at 20,960 units SAAR as multiple unit starts fell 19 per cent from February. Compared to March 2018, total starts in Vancouver were down 36 per cent. Housing starts for the first quarter were 16 per cent lower than for the same quarter one year ago.
- In the Victoria CMA, housing starts fell 49 per to 2,084 units SAAR after a very strong February in which new starts were on a 4,100 unit annual pace. New home construction was also down year-over-year, falling 42 per cent compared to last March due to lower starts in the multiple unit sector.
- There is significant new construction underway in the Kelowna CMA , particularly in the apartment condo market. Total starts jumped 84 per cent from February, including a more than doubling of multi-unit starts.
Bank of Canada Interest Rate Announcement - January 9, 2018
The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the outlook for the Canadian economy is moderating due to falling oil prices and mandatory production cuts in Alberta and a slowdown in global demand due to US-China trade tensions. As a result, the Bank has trimmed its forecast for Canadian economic growth in 2019 from 2.1 per cent to 1.7 per cent. Total inflation is being dragged lower by falling gasoline prices, though core inflation remains near the Bank's 2 per cent target.
While the direction of future monetary policy remains tilted toward higher interest rates, our baseline forecast is for a single rate hike as the most likely outcome for 2019. With a housing market battered by the stress test and signs of slowing growth elsewhere in the economy, it will be difficult for the Bank to accelerate monetary tightening beyond a gradual pace. A less hawkish Bank of Canada, along with a steep fall in Canadian bond yields, should translate to mortgage rates flattening out or even moving slightly lower in 2019.
The Bank of Canada left its target for the overnight rate unchanged at 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the outlook for the Canadian economy is moderating due to falling oil prices and mandatory production cuts in Alberta and a slowdown in global demand due to US-China trade tensions. As a result, the Bank has trimmed its forecast for Canadian economic growth in 2019 from 2.1 per cent to 1.7 per cent. Total inflation is being dragged lower by falling gasoline prices, though core inflation remains near the Bank's 2 per cent target.
While the direction of future monetary policy remains tilted toward higher interest rates, our baseline forecast is for a single rate hike as the most likely outcome for 2019. With a housing market battered by the stress test and signs of slowing growth elsewhere in the economy, it will be difficult for the Bank to accelerate monetary tightening beyond a gradual pace. A less hawkish Bank of Canada, along with a steep fall in Canadian bond yields, should translate to mortgage rates flattening out or even moving slightly lower in 2019.
Bank of Canada Interest Rate Announcement - October 24, 2018
The Bank of Canada raised its target for the overnight rate by 25 basis points to 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is expected to average growth of 2 per cent over the second half of 2018 before slowing to 1.9 per cent next year. The renegotiation of NAFTA is expected to lower uncertainty and boost business investment and exports while households spending and the housing market are stabilizing after the implementation of the B20 mortgage stress test. Inflation is expected to remain close to 2 per cent over the Bank's two year projection horizon.
The resolution of NAFTA negotiations earlier in the fall paved the way for the Bank of Canada to resume its rate tightening this morning. While inflation data came in slightly soft in September, the Canadian economy is still operating above its long-run trend which should keep inflation near the Bank's 2 per cent target. The Bank will meet one final time in 2018 at its December meeting, at which we expect policymakers will maintain the target rate at is current level before raising the target rate to 2 per cent in January 2019. As the target rate continues on its path higher, Canadian mortgage rates will continue to rise, ultimately resulting in a 6 per cent qualifying rate by the end of 2019.
The Bank of Canada raised its target for the overnight rate by 25 basis points to 1.75 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is expected to average growth of 2 per cent over the second half of 2018 before slowing to 1.9 per cent next year. The renegotiation of NAFTA is expected to lower uncertainty and boost business investment and exports while households spending and the housing market are stabilizing after the implementation of the B20 mortgage stress test. Inflation is expected to remain close to 2 per cent over the Bank's two year projection horizon.
The resolution of NAFTA negotiations earlier in the fall paved the way for the Bank of Canada to resume its rate tightening this morning. While inflation data came in slightly soft in September, the Canadian economy is still operating above its long-run trend which should keep inflation near the Bank's 2 per cent target. The Bank will meet one final time in 2018 at its December meeting, at which we expect policymakers will maintain the target rate at is current level before raising the target rate to 2 per cent in January 2019. As the target rate continues on its path higher, Canadian mortgage rates will continue to rise, ultimately resulting in a 6 per cent qualifying rate by the end of 2019.
Bank of Canada Interest Rate Announcement - September 5, 2018
The Bank of Canada maintained its target for the overnight rate at 1.50 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is evolving in line with its projections and that real GDP growth is expected to slow in the third quarter due to fluctuations in energy production and exports. Inflation is anticipated to come down from the 7-year high of 3 per cent rate observed in July, falling back to 2 per cent in early 2019. The Bank further noted that housing markets are beginning to stabilize following the implementation of the mortgage stress test. Overall, the Bank's assessment is that higher interest rates will be warranted to achieve the 2 per cent inflation target, but policymakers are closely monitoring NAFTA negotiations and their impact on the inflation outlook.
With the threat of significant trade disruption looming from NAFTA negotiations, the Bank chose to pause its rate tightening cycle. However, strong economic growth over the past year has pushed the Canadian economy beyond its full-employment level, creating upward pressure on inflation. Rising inflation and an economy operating at capacity means that the Bank of Canada will continue on its rate tightening path, likely at it next meeting in October with an ultimate goal of the overnight rate returning to between 3 and 3.5 per cent over the next two years.
The Bank of Canada maintained its target for the overnight rate at 1.50 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is evolving in line with its projections and that real GDP growth is expected to slow in the third quarter due to fluctuations in energy production and exports. Inflation is anticipated to come down from the 7-year high of 3 per cent rate observed in July, falling back to 2 per cent in early 2019. The Bank further noted that housing markets are beginning to stabilize following the implementation of the mortgage stress test. Overall, the Bank's assessment is that higher interest rates will be warranted to achieve the 2 per cent inflation target, but policymakers are closely monitoring NAFTA negotiations and their impact on the inflation outlook.
With the threat of significant trade disruption looming from NAFTA negotiations, the Bank chose to pause its rate tightening cycle. However, strong economic growth over the past year has pushed the Canadian economy beyond its full-employment level, creating upward pressure on inflation. Rising inflation and an economy operating at capacity means that the Bank of Canada will continue on its rate tightening path, likely at it next meeting in October with an ultimate goal of the overnight rate returning to between 3 and 3.5 per cent over the next two years.
Bank of Canada Interest Rate Announcement - July 11, 2018
The Bank of Canada opted to raise its target for the overnight rate 25 basis points to 1.5 per cent this morning. In the statement accompanying the decision, the Bank cited that the economy is operating close to capacity and as a result inflation is expected to edge higher over their two year forecast horizon. The Bank noted that incoming data suggests housing markets are starting to stabilize after the implementation of the B20 stress test.
With inflation rising to the Bank's two per cent target and the Canadian economy operating at or near capacity, the Bank of Canada is unlikely to be finished tightening. At its current level, the overnight rate is about 150 basis points below the 3 per cent rate the Bank would ultimately prefer it to be. However, the Bank may take a brief pause to assess the impact of its past tightening as well as the ongoing effects of the B20 stress test on housing markets. It may also be dissuaded from further tightening should there be a further escalation in trade tariffs from the United States. Overall, we expect at least one more round of rate increases from the Bank of Canada in 2018.
The Bank of Canada opted to raise its target for the overnight rate 25 basis points to 1.5 per cent this morning. In the statement accompanying the decision, the Bank cited that the economy is operating close to capacity and as a result inflation is expected to edge higher over their two year forecast horizon. The Bank noted that incoming data suggests housing markets are starting to stabilize after the implementation of the B20 stress test.
With inflation rising to the Bank's two per cent target and the Canadian economy operating at or near capacity, the Bank of Canada is unlikely to be finished tightening. At its current level, the overnight rate is about 150 basis points below the 3 per cent rate the Bank would ultimately prefer it to be. However, the Bank may take a brief pause to assess the impact of its past tightening as well as the ongoing effects of the B20 stress test on housing markets. It may also be dissuaded from further tightening should there be a further escalation in trade tariffs from the United States. Overall, we expect at least one more round of rate increases from the Bank of Canada in 2018.
Bank of Canada Interest Rate Announcement - April 18, 2018
The Bank of Canada decided to leave the target for the overnight policy rate unchanged at 1.25 per cent this morning. In the statement accompanying the decision, the Bank noted that inflation is forecast to be slightly higher in 2018 than originally expected but will return to the Bank's 2 per cent target once the impact of higher gas prices and minimum wage increases dissipate. While the mortgage stress test has been a contributor to weaker growth in the first quarter of 2018, the Bank expects the economy to be operating at above potential over the next three years, growing at an average rate of about 2 per cent.
Although the Bank held steady today, with inflation rising to the Bank's two per cent target and many Canadian firms operating at or near capacity, interest rates are very likely headed higher this year. Headwinds from the trade sector have moderated, energy prices are higher and growth for the first quarter appears to be firming after a slow start. Given those trends, the Bank is likely to adjust its policy rate higher in coming months. That will translate to higher mortgage rates which, combined with the erosion of purchasing power from the mortgage stress test, will temper housing demand in 2018.
The Bank of Canada decided to leave the target for the overnight policy rate unchanged at 1.25 per cent this morning. In the statement accompanying the decision, the Bank noted that inflation is forecast to be slightly higher in 2018 than originally expected but will return to the Bank's 2 per cent target once the impact of higher gas prices and minimum wage increases dissipate. While the mortgage stress test has been a contributor to weaker growth in the first quarter of 2018, the Bank expects the economy to be operating at above potential over the next three years, growing at an average rate of about 2 per cent.
Although the Bank held steady today, with inflation rising to the Bank's two per cent target and many Canadian firms operating at or near capacity, interest rates are very likely headed higher this year. Headwinds from the trade sector have moderated, energy prices are higher and growth for the first quarter appears to be firming after a slow start. Given those trends, the Bank is likely to adjust its policy rate higher in coming months. That will translate to higher mortgage rates which, combined with the erosion of purchasing power from the mortgage stress test, will temper housing demand in 2018.
Bank of Canada Interest Rate Announcement - March 7, 2018
The Bank of Canada opted to maintain its target for the overnight interest rate this morning at 1.25 per cent. In the statement accompanying the decision, the Bank noted that although growth in the Canadian economy slowed more than expected in the fourth quarter of 2017, the economy is expected to operate at capacity going forward. The bank cited recent trade policy developments, mainly the threat of a trade war with the United States, as a significant risk to its outlook for growth and inflation.
The Canadian economy is at or very close to full-employment, meaning there is little room for Canadian firms to expand output without putting undue pressure on inflation. There are signs core inflation is already firming up. Two of the Bank’s three core inflation measures are closing in on the Bank’s 2 per cent target and all three measures have increased significantly in the past six months. Absent any unforeseen challenges to the Canadian economy, monetary policy will be biased in the direction of higher interest rates. However, the Bank will likely hold off raising its overnight rate while it assesses the impact of tighter monetary policy over the past year, the impact of newly implemented B-20 guidelines on mortgage qualification rules, and heightened risk to Canadian exports from US trade policy.
The Bank of Canada opted to maintain its target for the overnight interest rate this morning at 1.25 per cent. In the statement accompanying the decision, the Bank noted that although growth in the Canadian economy slowed more than expected in the fourth quarter of 2017, the economy is expected to operate at capacity going forward. The bank cited recent trade policy developments, mainly the threat of a trade war with the United States, as a significant risk to its outlook for growth and inflation.
The Canadian economy is at or very close to full-employment, meaning there is little room for Canadian firms to expand output without putting undue pressure on inflation. There are signs core inflation is already firming up. Two of the Bank’s three core inflation measures are closing in on the Bank’s 2 per cent target and all three measures have increased significantly in the past six months. Absent any unforeseen challenges to the Canadian economy, monetary policy will be biased in the direction of higher interest rates. However, the Bank will likely hold off raising its overnight rate while it assesses the impact of tighter monetary policy over the past year, the impact of newly implemented B-20 guidelines on mortgage qualification rules, and heightened risk to Canadian exports from US trade policy.
Bank of Canada Interest Rate Announcement - January 17, 2018
The Bank of Canada opted to raise the target for its overnight interest rate this morning 25 basis points to 1.25 per cent. In the statement accompanying the decision, the Bank cited recent strong economic data and rising inflation as motivations for the rate increase. The Bank expects growth in the Canadian economy to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019 with consumption and new home construction contributing less to growth than in years past. With the economy returning to full-capacity, inflation is forecast to remain at 2 per cent over the medium term. The Bank also flagged risk to its outlook from ongoing NAFTA negotiations and noted it would remain cautious in considering future interest rate adjustments.
With the Canadian unemployment rate hitting a 40-year low and inflation ticking higher in recent months, the Canadian economy would seem to be operating at full capacity. That argues for a more hawkish approach to monetary policy in order to bring interest rates closer to what the Bank estimates would be neutral for the economy, that is, a level in which the economy is neither running too hot nor too cold. While today's rate increase was widely anticipated, it did come earlier in the year than previously expected and likely signals further rate increases to come in 2018. Canadian mortgage rates have already moved higher in anticipation of Bank of Canada tightening, which means a much tighter borrowing environment in 2018, particularly given newly implemented mortgage qualifying rules for low-ratio buyers.
The Bank of Canada opted to raise the target for its overnight interest rate this morning 25 basis points to 1.25 per cent. In the statement accompanying the decision, the Bank cited recent strong economic data and rising inflation as motivations for the rate increase. The Bank expects growth in the Canadian economy to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019 with consumption and new home construction contributing less to growth than in years past. With the economy returning to full-capacity, inflation is forecast to remain at 2 per cent over the medium term. The Bank also flagged risk to its outlook from ongoing NAFTA negotiations and noted it would remain cautious in considering future interest rate adjustments.
With the Canadian unemployment rate hitting a 40-year low and inflation ticking higher in recent months, the Canadian economy would seem to be operating at full capacity. That argues for a more hawkish approach to monetary policy in order to bring interest rates closer to what the Bank estimates would be neutral for the economy, that is, a level in which the economy is neither running too hot nor too cold. While today's rate increase was widely anticipated, it did come earlier in the year than previously expected and likely signals further rate increases to come in 2018. Canadian mortgage rates have already moved higher in anticipation of Bank of Canada tightening, which means a much tighter borrowing environment in 2018, particularly given newly implemented mortgage qualifying rules for low-ratio buyers.
OCTOBER 17, 2017 announcement for January 2018 Mortgage Changes
Almost 1 year to the date of the 2016 mortgage changes OSFI announced new rules to come into effect January 1, 2018 that will require buyers who are making down payments of more than 20 per cent of a home's value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiated.
Previously, stress test requirements only applied to insured mortgages (those with down payments of less than 20%) and most variable mortgages and terms less than five years.
The so-called new “stress test” is designed to protect homeowners should interest rates rise. Lenders will be obligated to qualify all new conventional mortgages at the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89%) or the contracted rate plus 2%.
So for example, if your contract rate is 3.29%, you will be qualified at 5.29%.
High Ratio and Variable rate products will still be qualified at the 5 year BOC benchmark rate.
Last month, the qualifying rate—which closely resembles the average posted five-year fixed rates from the Canadian banks—was raised to 4.64% from 4.84 and now is 4.99%
Remember:
QUALIFYING RATE is the BOC Conventional 5 year fixed posted rate.
CONTRACT RATE is the rate offered by the Lender in which home buyer’s actual mortgage payments are based upon.
The changed are to come into full effect on January 1st, 2018, 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."
NOTE:
RENEWALS:
OSFI's new guidelines also clarified that borrowers who are renewing mortgages will not have to meet the new stress-test standard as long as they are staying with the same bank. However, renewals done with another lender will have to qualify under the revised standards because they require new underwriting.
Trapped renewers: Lenders are thrilled about one thing: customer retention. As many as one in six people renewing their mortgage could be trapped at their existing bank because they can't pass the stress test at another lender. And if a bank knows you can't leave, you can bet your boots they'll use that as leverage to serve up subpar renewal rates.
Here’s an example of a new mortgage qualifying for purchase with 20% down:
New mortgage qualifying for purchases with 20% down
Household Income Purchasing Power Income Purchasing Power
Today Jan 1, 2018
$60,000 $409,626 $334,323
$100,000 $682,710 $557,206
$150,000 $1,024.065 $835,809
$200,000 $1,365,420 $1,114,411
Assuming you’re making $60,000 a year, have no debt and 20 per cent down, based on a stress test of the contract rate plus 200 basis points, consumers now qualify for 18 per cent less loan
For illustration purposes only. Based on 25 yr amortization, 20% down purchases, 5 yr term, qualifying rate 3.29% today and 5.29% January 2018. Does not include property taxes, heat or condo fees. OAC.
Here is a quick analysis of October 2008 rules vs. January 2018 Rules.
If we look at a $480,000 refinance on a $600,000 house with a $1,000 per month basement suite. The income needed to qualify for that refinance now vs. then using the same contract rate of 3.5% and looking at a 25 year amortization on the refinance – you would need 150% of the employment income to qualify today – eg: 90K compared to 60K
NOTE: Most provincially regulated lenders are not bound by the OSFI's new rules.(credit unions)
Toronto-Dominion Bank economist Brian DePratto estimated in a report Tuesday that the OSFI changes will depress housing demand by 5 per cent to 10 per cent, and will reduce price growth by 2 per cent to 4 per cent over 2018.
Mortgage Professionals Canada warned the changes could reduce the volume of home sales by 10 per cent to 15 per cent annually, resulting in 50,000 to 75,000 fewer home sales a year in Canada, when combined with other mortgage rule changes announced last year.
Almost 1 year to the date of the 2016 mortgage changes OSFI announced new rules to come into effect January 1, 2018 that will require buyers who are making down payments of more than 20 per cent of a home's value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiated.
Previously, stress test requirements only applied to insured mortgages (those with down payments of less than 20%) and most variable mortgages and terms less than five years.
The so-called new “stress test” is designed to protect homeowners should interest rates rise. Lenders will be obligated to qualify all new conventional mortgages at the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89%) or the contracted rate plus 2%.
So for example, if your contract rate is 3.29%, you will be qualified at 5.29%.
High Ratio and Variable rate products will still be qualified at the 5 year BOC benchmark rate.
Last month, the qualifying rate—which closely resembles the average posted five-year fixed rates from the Canadian banks—was raised to 4.64% from 4.84 and now is 4.99%
Remember:
QUALIFYING RATE is the BOC Conventional 5 year fixed posted rate.
CONTRACT RATE is the rate offered by the Lender in which home buyer’s actual mortgage payments are based upon.
The changed are to come into full effect on January 1st, 2018, 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."
NOTE:
- 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.
RENEWALS:
OSFI's new guidelines also clarified that borrowers who are renewing mortgages will not have to meet the new stress-test standard as long as they are staying with the same bank. However, renewals done with another lender will have to qualify under the revised standards because they require new underwriting.
Trapped renewers: Lenders are thrilled about one thing: customer retention. As many as one in six people renewing their mortgage could be trapped at their existing bank because they can't pass the stress test at another lender. And if a bank knows you can't leave, you can bet your boots they'll use that as leverage to serve up subpar renewal rates.
- 5 years ago buyers were able to qualify on a 40 year amortization with the contract rate
Here’s an example of a new mortgage qualifying for purchase with 20% down:
New mortgage qualifying for purchases with 20% down
Household Income Purchasing Power Income Purchasing Power
Today Jan 1, 2018
$60,000 $409,626 $334,323
$100,000 $682,710 $557,206
$150,000 $1,024.065 $835,809
$200,000 $1,365,420 $1,114,411
Assuming you’re making $60,000 a year, have no debt and 20 per cent down, based on a stress test of the contract rate plus 200 basis points, consumers now qualify for 18 per cent less loan
For illustration purposes only. Based on 25 yr amortization, 20% down purchases, 5 yr term, qualifying rate 3.29% today and 5.29% January 2018. Does not include property taxes, heat or condo fees. OAC.
Here is a quick analysis of October 2008 rules vs. January 2018 Rules.
If we look at a $480,000 refinance on a $600,000 house with a $1,000 per month basement suite. The income needed to qualify for that refinance now vs. then using the same contract rate of 3.5% and looking at a 25 year amortization on the refinance – you would need 150% of the employment income to qualify today – eg: 90K compared to 60K
NOTE: Most provincially regulated lenders are not bound by the OSFI's new rules.(credit unions)
Toronto-Dominion Bank economist Brian DePratto estimated in a report Tuesday that the OSFI changes will depress housing demand by 5 per cent to 10 per cent, and will reduce price growth by 2 per cent to 4 per cent over 2018.
Mortgage Professionals Canada warned the changes could reduce the volume of home sales by 10 per cent to 15 per cent annually, resulting in 50,000 to 75,000 fewer home sales a year in Canada, when combined with other mortgage rule changes announced last year.
Source from BCREA