Last year was a pivotal time for mortgage regulations in Canada. The government introduced four major rule changes that are still just beginning to have ripple effects in the homebuying market.
But it wasn't done. This morning, the Office of the Superintendent of Financial Institutions (OSFI) announced one final tweak to the revisions that have been made over that past year.
Previously, buyers who, by making a larger down payment of 20 per cent or more, were able to secure a mortgage without requiring mandatory insurance, were also exempt from the stress test that came alongside it, as of 2016. That is no longer the case. Uninsured buyers are now obliged to complete that stress test as well.
The revision was made in response to the unintended incentivization of shorter-term mortgages that was brought on by the initial rule changes. By giving people a reason to over-extend their down payments or seek out lower interest rates—and, subsequently, end up with a shorter mortgage term—market conditions were changing to a significant degree that the government wasn't totally on board with.
"We didn't want to create an artificial incentive for borrowers to shorten term because of the regulation," said OSFI superintendent Jeremy Rudin.
The other change that was confirmed in Tuesday's announcement was a new wrinkle to the stress test that adds another option to how buyers are evaluated. In addition to the original method of using the five-year benchmark rate posted by the Bank of Canada, buyers will now have to prove that they can handle the original contractual rate plus two per cent, if that figure is greater than the benchmark rate projection.
Though these changes were brought on to quell the unintended consequences that were already emerging from last year's revisions, it is entirely possible that the latest ones could produce a similar unforeseen effect—one that the financial community will be watching out for.
"Our only remaining concern is the risk that all these changes will act in concert to create a more pronounced slowdown than any one regulatory body intended," wrote CIBC financial services analyst Robert Sedran in a research note Tuesday. "The answer to that question will only emerge in time."