“At the end of the day, consumers will end up either not being able to buy the home they really want to or just being disqualified entirely from the marketplace in some instances,” said Taylor, who was recently in Charlottetown speaking to provincial government officials, MLAs and community leaders about the proposed changes by the Office of the Superintendent of Financial Institutions (OSFI). Taylor also visited Fredericton, Halifax and St. John’s.
Currently, a potential homeowner with less than the 20 per cent down payment needs to qualify for mortgage insurance. This involves qualifying for a mortgage at the Bank of Canada’s posted five-year rate of 4.84 per cent interest. Even if a mortgage is at an actual lower interest rate of around 3.2 per cent, the mortgage can only be insured at the Bank of Canada rate.
Taylor expects the Bank of Canada rate to climb above five per cent, meaning there is about a two per cent difference between the actual interest rate and the Bank of Canada rate needed to qualify for mortgage insurance.
This means that previously qualifying for a $150,000 home would now qualify you for a $120,000 home.
“That’s a pretty significant jolt in terms of quality of life than the type of living arrangement you’d like,” he said.
Taylor explained the OSFI is proposing a stress test that now includes uninsured borrowers (with a 21 per cent or more down payment).
The proposed changes will lower the risk for lenders as well as provide people with more money in their budget because they qualify to borrow less money.
But the downside is that some buyers can “afford less house.” Also, the proposed changes will make it more difficult for a first-time buyer to qualify for a mortgage, which will reduce the supply of potential buyers for homeowners looking to sell and move into a new home. Fewer potential buyers will lower the value of existing homes for sale, he added.
“When people feel like their home values are falling, they really just do not spend money the way they used to. They don’t go out for dinner (and) they don’t go out for drinks on the weekend. And that hurts local businesses and hurts the economy.”
This proposed stress test follows last year’s stress test for insured potential homeowners.
With respect to Charlottetown and the Island, Taylor noted the past 12-18 months has been good for the housing market with an influx of immigrants and high demand for existing housing. This has led to higher prices and more housing starts.
“Because the majority of your market is not being driven by first-time buyers, you haven’t really seen too much damage, at least not in Charlottetown. When you get into some of the more rural areas of the province, you may see some effects.”
Taylor said the new stress test is “overcautious” in a market that was performing well and has seen more requirements regarding a potential borrower’s maximum debt ratio and increased down payments.
He said are looking at the “prudence of the lending before we’re considering the civic benefits of home ownership.”
OSFI declined to comment for this story. The proposed changes were released in July and are still in the consultation phase.