New First-Time Home Buyer Incentive On Deck

Mortgage Report: April 26

The long-awaited revamp of the First-Time Home Buyer Incentive (FTHBI) is imminent. CMHC just added this overview to its website, which confirms it.

You can't apply yet, however. CMHC tells RATESDOTCA that, "...Applications under the new rules will be accepted once the expansion is launched." That's reportedly happening May 3.

A spokesperson added, "There will be an official announcement on the expansion of the First-Time Home Buyer Incentive and all the details will be announced soon."

Here's what we do know. Compared to the existing FTHBI—the new version will include two key changes for default-insured borrowers in the Toronto, Vancouver and Victoria Census Metropolitan Areas (CMAs):

1. Maximum allowable household income will rise from $120,000 to $150,000
2. The amount you can borrow will increase from 4 times household income to 4.5 times (the Liberal government originally proposed 5 times but allegedly got pushback from critics like former CMHC, CEO Evan Siddall).

These two changes will meaningfully increase the mortgage amount that FTHBI users in these cities will qualify for.

Here are maps showing the three new regions eligible for the new FTHBI:

• Toronto CMA (Burlington, Whitby and surrounding areas don't make the cut)
• Vancouver CMA (Sorry Langley, Maple Ridge and towns to the east)
• Victoria CMA

As for why other sellers' markets like Hamilton, Ottawa and Montreal aren't eligible, we're waiting for CMHC's comment on that.

If you want to know how much you'd qualify for with FTHBI 2.0, CMHC has a new calculator. Check it out here.

A Tougher Stress Test Nears

In just 36 days, the banking regulator will tighten the screws on people with 20%+ equity. Its new stress-test formula will make it incrementally harder for higher-indebted borrowers to get a mortgage.

OSFI's new stress test raises the minimum interest rate that borrowers must prove they can afford. If all goes as planned, it'll rise from 4.79% today to 5.25% on June 1.

If you're wondering whether the final stress test rule will look like the one OSFI proposed on April 8, bet on yes. The regulator is allowing just 17 days to review all the comments and make an official public statement. The June 1 implementation date is then just one week later.

Regulators don't move that fast unless their minds are pretty well made up. Moreover, banks need time to change their systems. Hence, we don't want to say OSFI is merely going through the motions on this public comment period, but odds suggest they won't make any major last-minute changes.

Either way, borrowers will adapt to the rule's new 4% buying power reduction...and life will go on.

But we do expect four related outcomes:

• Slightly less housing demand at the margins
  • 1 in 4 had total debt service (TDS) ratios of 43% or more in the second half of 2020, says OSFI
  • 44% is the traditional TDS limit, and the new stress test adds about 1.5 percentage points
  • That means a sizable number of uninsured borrowers may not qualify unless they adapt
• Greater use of credit unions and alternative lenders that don't employ the federal stress test
• More debt ratio exceptions from banks
  • "B-20 does not have gross debt service and total debt service limits," OSFI told RATESDOTCA. But despite OSFI's warning of greater oversight, debt-ratio exceptions will continue.
• Greater use of 30-year amortizations (again, despite OSFI's warnings to lenders).

This & That

• HSBC has a newHELOC rate promo at prime rate (2.45%)
  • Yet it still plays second fiddle to Tangerine's long-running prime - 0.10% (2.35%) HELOC
  • Tangerine's offer has defied all expectations for staying power, putting major pressure on competitors' LOC pricing for over 13 months now
• Capital Economics expects inflation to surge past 3% in April and stay above 2% throughout 2021
  • 2% is the Bank of Canada's normal mid-point target
  • Economists say prices are running hot because of "base effects" (i.e., abnormally low inflation in the year-ago month)
  • But many fear that base effects will transition to more sustained inflation
  • The more correct these skeptics are, the greater the probability of higher-than-expected rate hikes in a year or two
• It was east versus west with home price gains last month, as this chart from Brookfield RPS shows
  • By the way, in our humble little opinion, Brookfield has the best home price measure in the business with its "National 3500" index
  • The reasons: (1) it uses median values to minimize outliers; (2) it surveys all 3,500 municipalities in Canada for the most comprehensive national reading; (3) it doesn't rely on a "paired sales" model where the same home must resell to have its price included in the index (most homes only sell every 4-7 years, says RPS); and (4) it filters out properties that are substantially different from surrounding properties. RPS sometimes posts the National 3500 on its Facebook page.