ON THE RISE: Rates and Qualifying

We have all been on one wild ride whether you know it or not. Perhaps even hitting unchartered territory now.

You have likely heard about the rate changes. We have experienced some sizable increases. Mostly for the fixed rates, but also with the variable.

In the matter of two weeks we have seen fixed rates make two leaps upwards, each lender landing at a slightly different interval, but overall consumers rates have increased 20 to 50 points higher than the end of June 2017. This was mainly due to the sudden jump in the Canadian Bond rates.

Consumers securing mortgages with today’s rates can expect to pay up to $500 more per year per $100,000 in mortgage loans.

For the variable rate, lenders had only made minor changes, if any at all.  If the lender increased rates it was between 5 to 10 points off their discount.  However, the variable rate can be impacted in more than one way:

  1. by the lender changing the discount they offer.
  2. through changes to the lender’s Prime Rate.

Lender’s determine their Prime rate from The Bank of Canada (BOC) overnight target rate, the short-term lending rate. On July 12th, the 5th of 8 BOC announcements for 2017 resulted in the overnight rate increasing for first time in nearly 7-years. The overnight rate increased a quarter point from a ½ per cent to ¾ per cent. The last change announced by the BOC was in July 2015 where the overnight decreased from a ¾ per cent to ½ per cent. BOC overnight announcement.

Further to the hyper activity in rates, what you may not have heard about is a letter released on July 7th addressing new pending mortgage regulations.  This time from The Office of the Superintendent of Financial Institutions (OFSI), regulators and supervisors of 1200 pension plans and 400 federally regulated financial institutions, including all of Canada’s major banks.

Revisions to Guideline B-20 could have conventional borrowers, those with 20% or greater invested, to qualify under a stress test at a rate 2% higher than the contract rate (the rate consumers pay). In addition, the Guideline B-20 could restrict loan-to-values for specific market locations, non-conforming loans and Home Equity Lines of Credit (lines of credit secured by one’s home) among other adjustments.

This is a game changer.  This could be the straw that slows the market down, in a hurry – and potentially too fast. Applying a stress test to 80% of the market place, yes, 80% of our homeowners are conventional borrowers, is substantial.  Limiting them on qualifying and the loan-to-value they can access can handcuff responsible borrowers and potentially cripple the real estate market.

Details on the guidelines and letter released:

Guidelines November 2014 
Press Release
 July 6, 2017
Letter July 7, 2017
Draft Guidelines July 2017

As per OSFi’s Press Release, OSFI is inviting feedback through written submissions from interested stakeholders and the wider public before finalizing Guideline B-20. Comments should be submitted to OSFI by email at B.20@osfi-bsif.gc.ca by August 17, 2017. Following a review of the submissions, OSFI will finalize the guideline and set an effective date for later in 2017.

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