ERICA ALINI (GLOBAL NEWS) - Canada’s banking regulator introduced new rules on Tuesday that extend the requirement for a mortgage stress test to all homebuyers, including those with larger down payments. Currently, the stress test applies only to mortgages with lower down payments and those with a term of less than five years.
Today, the Office of the Superintendent of Financial Institutions (OSFI) introduced a new minimum qualifying rate – a.k.a “stress test” – even for uninsured mortgages, which have down payments of 20 per cent or more.
The guidelines will take effect Jan. 1, 2018 and apply to new mortgages as well as mortgage renewal applications if borrowers switch lenders. Financial institutions won’t be obligated to apply the test at mortgage renewal for existing borrowers, although they may choose to do so, OSFI told Global News.
The new guidelines now require federally regulated financial institutions to vet applicants for uninsured mortgages by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89 per cent) or their contractual rate plus 2 percentage points.
What this means for your mortgage
Here’s how the rules would play out for a family with $100,000 in annual income, according to numbers provided by Ratehub.ca, a mortgage rates and credit cards comparisons site.
Let’s consider a first scenario in which the family is offered a mortgage rate of 2.83 per cent, which is more than two percentage points below the current Bank of Canada five-year benchmark of 4.89 per cent.
If they were to apply for a mortgage today, with 20 per cent down payment, a five-year fixed mortgage, and a 25-year amortization period, they would be able to afford a home worth $726,939.
If they were to apply for a mortgage on or after Jan. 1, they would be able to afford only $570,970, with a 20 per cent down payment.
Now, let’s look at a second possible scenario. The family qualifies for a 3.09 per cent mortgage. That rate, plus 2 percentage points is higher than the Bank of Canada’s 4.89 per cent five-year benchmark. The family would then be vetted using a 5.09 per cent rate.
Under the current rules, they would be able to buy a home worth $706,692 with a 20 per cent down payment.
With the new guidelines, they would be able to afford a $559,896.
New rules likely to push buyers toward provincially-regulated lenders, cheaper homesThe new rules will likely further slow down housing activity, possibly dragging down prices by between 2 and 4 per cent over 2018, TD economist Brian DePratto wrote in a research note.
“On balance, these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment,” reads the note.
The new rules will likely also push some buyers toward provincially-regulated mortgage lenders, such as credit unions, which are not affected by the OSFI changes, DePratto told Global News via phone.
And some prospective home buyers will be forced to opt for cheaper homes, like townhouses and condos, he added.
The final guidelines are generally similar to what OSFI had proposed in July when the regulator put out a draft for public consultation.
The proposed changes, however, have been criticized for potentially increasing costs and limiting access to mortgages for some home buyers.
Meanwhile, the OSFI says the changes are warranted.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said OSFI superintendent Jeremy Rudin in a statement on Tuesday.
Other changes include restrictions on co-lending, or bundled mortgages, aimed at ensuring financial institutions do not circumvent rules that limit how much they can lend.
GLEN KORSTROM (BUSINESS IN VANCOUVER) A group of condominium owners won a huge court victory over their neighbours September 21 when BC Supreme Court Justice Warren Milman dismissed an attempt by a larger group of owners to wind up their strata corporation and sell assets to a developer.
Milman ruled that the strata corporation at Bel-Ayre Villa, at the corner of West 10th Avenue and Burrard Street, did not follow the process set out in the B.C. government’s Bill 40, which passed last year. The legislation loosened regulations for selling stratified buildings to allow for sales as long as 80% of owners support the transaction and a BC Supreme Court judge approves the sale.
Previously, unanimous consent from owners was required
The Bel-Ayre case is the first in which a strata corporation that obtained the necessary 80% support from owners failed to obtain court approval.
Strata corporation windups that have received court approval include Twelve Oaks at 2777 Oak Street and Brandywine at 585 Austin Avenue in Coquitlam.
Neither of those cases involved dissenting owners appearing in court to argue against the sale. Instead, owners in those developments who opposed the deal told Business in Vancouver that they were resigned to accepting the sale and they did not see the value of hiring a lawyer to argue their case.
Owners at Bel-Ayre voted 30-6, or 83.33%, in January to wind up the strata and sell the site to BCIMC Realty for $19 million.
Dissenting owners, such as Christine Raverty, however, were determined to fight the sale and were elated by Milman’s judgment.
“We could not have hoped for a better outcome than to know our daughter will be able to remain in a home she loves,” said Raverty, whose daughter, Krystal Wells, lives in her Bel-Ayre Villa suite.
Milman’s decision to reject the sale was based on the strata corporation failing to attach an interest schedule to documents that owners received in advance of the January vote. Instead, an interest schedule was provided after owners voted.
B.C.’s legislation is clear that this schedule must accompany other documents before windup votes in all cases where strata corporations intend to use a liquidator to sell assets.
Not only does the interest schedule set out how proceeds are to be divided among the owners, it also sets out all mortgage charges against units in the building.
“The value estimates approved as part of the interest schedule are an essential term of the liquidator’s mandate, rather than just another source of information that might affect the vote,” Milman wrote.
“Without them, the winding-up resolution is not validly approved. In other words, this is not a mere ‘procedural irregularity’ but an omission of substance.”
Clark Wilson LLP partner Veronica Franco, who represented the strata corporation, told BIV that she could not say why the strata corporation did not attach the interest schedule before the vote.
She called the omission a “technicality,” but said that “it provides a clear signal to future strata corporations that when it comes to doing this, and doing their interest schedules in particular, that they have to comply and there is no room for grey – even when nobody is hurt.”
Bel-Ayre strata council president Glenda Monts told BIV that she was disappointed with the ruling and that the strata council is reviewing its options, such as appealing the decision or restarting the process.
Raverty, meanwhile, said she is convinced that the strata council does not have the funds to restart. She said some of the owners who voted in favour of selling the complex have turned against the deal and that a future vote to sell the site would likely not garner the 80% threshold.
Raverty’s lawyer, Hammerberg Lawyers LLP partner Stephen Hamilton, told BIV that it is likely that had Milman not rejected the sale because of the problem with the interest schedule, the judge would have quashed it anyway because of other strata corporation missteps.
Hamilton said that in cases where a liquidator is to be involved, the strata corporation should not market the building or find a buyer. That job, he said, should be left to the liquidator, which in the case of Bel-Ayre Villa had not yet been appointed.
The route that Bel-Ayre Villa’s strata corporation should have taken was to get court approval for the 83.33% vote in favour of selling the complex and simultaneously to get the court to approve the appointment of a liquidator, who would then market the property.
“The strata corporation has no business at all entering into contracts for the sale of the building and putting them before the ownership for approval because the legislation appears to read that the only thing the strata corporation does is vote to wind up the strata, appoint a liquidator, have that confirmed by the court and then the liquidator takes over the process and the liquidator goes out to find prospective buyers,” he said.
Hamilton believes that Milman’s judgment is a warning to strata corporations to make sure that everything they do follows the letter of the law.
A separate case, involving a 33-unit project at 1188 Cardero Street, is slated to go to court on December 4 and 5.
Hamilton, who represents dissenting owners in that matter, said the case could rest on the strata corporation’s failure to name the liquidator in documents that owners were given before they voted to sell their building.
“That’s a key ingredient of the resolution,” he said.
“So it would seem to me, based on the signal that we now have from B.C. Supreme Court, that if you don’t provide all of the things that are required for the resolution and you have the owners vote on it, the court will not be prepared to approve the winding-up resolution. •
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