This is how OSFI's new mortgage rules will affect Canadian homebuyers

Canada's banking regulator unveiled tougher mortgage rules Tuesday, saying that even homebuyers with down payments of 20% or even more will need to prove they are able to afford higher interest rates.

The Office from the Superintendent of Financial Institutions Canada (OSFI) states that buyers who who apply for uninsured mortgages – those with a 20% down payment or more, or those buying homes worth $1 million or more – is going to be stress tested to show they are able to afford a home loan, either in the five-year average posted rate, or two percentage points greater than the rate their bank or broker offers them (whichever one is higher). The brand new rules go into effect Jan. 1, 2021.

Here's an example of the way the new rule changes will impact homebuyers. On our website, the current lowest variable five-year mortgage rate available in Ontario is 1.99%. A couple buying a home for $500,000 having a $125,000 deposit could be paying $1,743 per month at that rate (based on our mortgage calculator).

However, underneath the new rules, that very same couple is going to be stress tested prior to qualifying to ensure they are able to pay the mortgage at two percentage points higher – 3.99%. That means they ought to be in a position to show they are able to manage to pay a home loan of $2,165 per month.

That's a difference of $422 per month, or $5,064 a year.

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Earlier this month, OSFI announced it would be introducing a similar policy targeting homebuyers with mortgage insurance – people whose deposit is less than 20% – so that they can reduce Canada's contact with mortgage defaults. Before qualifying for a mortgage, homebuyers would need to show they could still service their monthly payments even if it increased by two percentage points.

The new rules seem to be targeted at taming Canada's overheated areas. In Toronto, evidence is mounting that the factors that caused home values to skyrocket between 2010 and 2021 weren't actually rooted in market fundamentals.

Population levels, incomes, and borrowing costs taken into account not even half of the 40% improvement in home values versus 75% in Vancouver – the city previously thought to be the poster child of investor speculation run amok – a study from Canada Mortgage & Housing Corp. found.

Some criticise the brand new rules to be too constrictive. The Fraser Institute, a Vancouver-based think tank that lobbies for limited government regulation, said the guidelines might trigger more instability in the housing industry. Based on its analysis, many prospective homebuyers would not be able to access mortgages and would have to use private lenders who charge higher interest rates – even though Canadians historically have a very good history to keep the money they owe current and finally paying them off.

According to OSFI, the changes were introduced to reinforce the expectation that “mortgage lenders remain vigilant within their mortgage underwriting practices.”