New Mortgage Rules 2018: Stress Test Effect on Real Estate




Looking back at the outstanding year of real estate activity in 2017, the Canadian Real Estate Association is forecasting a slower year in 2018.


This cut back has been driven by the new mortgage rule which is set to take effect January 1.  In October, 2017, the Office of the Superintendent of Financial Institutions announced a new mortgage "stress test" which will require  uninsured mortgages (those who have 20% or more down payment or are refinancing their mortgage) at major banks to qualify at either the posted benchmark rate (currently 4.9%) or 2% above the lenders' contracted interest rate, whichever is higher.


There is also speculation that the Bank of Canada may increase interest rates 1 to 2 times before the end of 2018.  Interest rate averages are predicted to reach a more "normal" level in an attempt to moderate housing prices and affordability.


The benchmark rate is predicted to reach 5.15% and the average lending interest rate is expected to reach up to 3.44%.  With the combination of increasing interest rates and new qualifying guidelines, we're likely to see a decline in housing prices, as these changes could reduce borrowing power up to 20%.  The Canadian Real Estate Association expects to see a drop in national sales by 5.3%.


Not all financial institutions will be required to abide by the new mortgage "stress test".  Non-federally regulated lenders, such as credit unions, are not required to comply with the new legislation.  For this reason, other lenders may very well hold off on increasing rates in order to remain competitive in the market.


I'll be watching closely over the first quarter of 2018 for ramifications of this new rule.


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