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New Mortgage Stress Test Will Hurt Already Financially Stressed Buyers in 2018

Real Estate Investors Financial Issues Could Get Worse in 2018

The Office of the Superintendent of Financial Institutions (OSFI) is expanding stress tests for all insured mortgages, not just those where a buyer has put down less than 20 percent of the purchase price. This change comes into effect on January 1, 2018. However, the OFSI has stated that “approved loan applications occurring between October 17, 2017 and January 1, 2018 might be subject to the new rules, depending on the institution.”

Under the new rules, all buyers will be required to prove they could continue to handle their mortgage payments if interest rates rise above the five-year benchmark rate published by the Bank of Canada, or a rate that is two percent higher than the contracted mortgage rate, whichever is higher. This will make it more difficult for many buyers to get mortgages. It will also cause additional stress and financial pressure on people who may already be overleveraged.

In hot real estate markets, such as Toronto and Vancouver, some buyers jump to purchase properties as investments without fully taking all factors into account. While some may have a down payment greater than 20 percent, this amount often comes in the form of a personal loan or other type of loan. In fact, many buyers took out personal loans to make sure they would have more than 20 percent to put down. In the past, this helped people avoid the previous stress test, but it will no longer help.

Debt, Financial Stress & Real Estate Investment

The new rules could cause financial trouble for investors who are struggling to get financing and who are also handling high levels of credit card debt, lines of credit, and other debts.

If an individual purchases a home and cannot get financing through an insured mortgage, the buyer will need to seek non-bank financing to close the sale. These loans are much costlier and have higher interest rates and less favourable repayment terms.

A buyer who got a personal loan to get a 20 percent down payment may now have to borrow even more money at a high interest rate if they are unable to get an insured mortgage due to the new rules. If they do not get a loan to cover the purchase price on an agreed sale, they could face financial or legal penalties.

Expensive housing costs, higher mortgage rates, and tighter lending rules can lead to serious financial problems for buyers.

The Affect of the New Mortgage Stress Test Rules

The 10-day “cooling off” period where a buyer can back out of buying a property only applies on new homes purchased directly from a builder or developer. There is no grace period for resale transactions and many real estate agreements include a “irrevocable period” where an offer cannot be withdrawn. A potential buyer risks losing their deposit and could face legal action from a seller if they try to break a firm agreement. Unless the offer included a condition that made the sale conditional on financing, buyers who are unable to get the financing they need due to the new mortgage rules could be in trouble. In hot real estate markets, many buyers place offers without conditions to be more competitive.

Buyers who would be unable to get required financing under the new rules will be looking to hurry to purchase a property or close a sale before the rules change.

If a buyer is unable to close a sale before the January 1 change, they could find themselves in trouble when it comes to securing financing. Even if a purchase agreement is signed before the new rules were announced, all loan applications or pre-approvals will be subject to the new rules as of January 1, 2017.

This means that, if a buyer is relying on qualifying under the old mortgage rules to close on a sale, they might find themselves unable to get an insured mortgage if the sale officially closes in 2018. If a buyer is unable to qualify for financing and therefore cannot close on a property that they agreed to purchase, they could find themselves facing stiff financial penalties and even dealing with potential lawsuits.

If You Are Struggling With Debt and Mortgage Problems

In general, it is a good rule to not be too emotional, impulsive, or financially aggressive when purchasing real estate. If you stretch yourself too thin on a purchase, you are more likely to have trouble with financing and repaying the debt owed.

If you have found yourself struggling to afford your home, have a high level of debt, are unable to secure financing, or you are dealing with a real estate transaction that you may not be able to close on, you should speak with a licensed financial professional on the issue. Please contact us today to find out how we can help.