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New mortgage rules announced this week could mean first-time home buyers will be taking out fewer loans from the Bank of Mom and Dad, experts say.
On Tuesday, the Office of the Superintendent of Financial Institutions (OSFI) announced a new mortgage stress test, which will require all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2 per cent.
The revisions are intended to ensure that uninsured borrowers can withstand higher interest rates. The overnight rate — which influences mortgages and sat at a historically low 0.5 per cent earlier this year — has been raised 50 basis points by the Bank of Canada since July, with a third hike predicted for later this year.
It’s a move that could impact the number of parents giving their children financial assistance for a downpayment.
In June, a survey from the Canada Mortgage Housing Corporation (CMHC) found that 18 per cent of first-time home buyers received some financial support from family.
“I think that there’s definitely one type of loan from the Bank of Mom and Dad that’s going to decrease, and that’s buyers who were getting assistance so that they can pass the 20 per cent down payment threshold, so they won’t have to have mortgage insurance or take the stress test,” Zoocasa CEO Lauren Haw tells BuzzBuzzNews.
Haw says that, now that both uninsured and insured home buyers will be subject to the test, parents will be less likely to give their children the extra cash needed to push them over the 20 per cent mark.
Some experts believe that the new rules will cut into the number of first-buyers looking to purchase homes, period. Former MP and author of the popular Greater Fool finance blog Garth Turner says the stress test will shut out plenty of young people from the market.
“The reality is that you’re going to see more people choosing to stay in the rental market in the coming months,” Turner tells BuzzBuzzNews. “People, even with the support of their parents, are going to be unable to access the market.”
Still others say that buyers relying on family support represent a relatively small portion of the market.
“One thing that’s important to emphasize in this conversation is that people who access the Bank of Mom and Dad are a minority, it’s not as widespread as we might imagine,” Mortgage Professionals Canada Chief Economist Will Dunning tells BuzzBuzzNews. “I think we will see these rules take 5 to 10 per cent out of the market, but I think the Bank of Mom and Dad, and the relatively few number of people who have access to it, will not be particularly affected.”
Haw has another prediction for the Bank moving forward — fewer outright financial gifts and more guarantors and cosigners.
“I think you’re going to see a number of first-time buyers who won’t have the credit to qualify on their own, who will be looking to their parents to help them get onto the market by acting as a guarantor,” Haw says.
She also offers a different reason that parents might be less willing to help their kids out with a downpayment — an increasingly balanced market.
September saw the country-wide sales-to-new-listings ratio level out to 55.7 per cent. A ratio of between 40 and 60 per cent is considered generally consistent with a balanced national housing market.
“I think last fall you had parents thinking, ‘If I don’t help them this year, it’s only going to get worse,’” Haw says. “I think now they might decide to hold off and allow their children to finance the property themselves.”