Earlier this week, the Office of Superintendent of Financial Institutions (OSFI) – Canada’s banking watchdog – introduced tougher mortgage rules to take effect January 1, 2018. This new ‘stress test’ applies to homebuyers with down payments greater than 20 percent and requires the mortgage applicant to qualify for the higher of the Bank of Canada 5-year qualifying rate or the mortgage-holder’s contracted rate + 2 percent.

The concept of a mortgage stress test was introduced last fall, aimed at buyers putting down less than 20 percent to ensure they could qualify at the lender’s 5-year posted rate. Uninsured mortgages were left out of the picture back then, with the idea that those putting more money down must be more prudent homebuyers.

Tougher Mortgage Rules

But think of all the down payments that have been gifted to first-time homebuyers by their parents and relatives. A first time buyer could purchase a $500,000 home with a $100,000 downpayment from the bank of mom & dad to skirt around the previous stress test rules and still be able to qualify for a $400,000 mortgage that he or she potentially could not afford.

One question that has popped-up several times on our Facebook page is whether the new rules apply to existing homeowners. The short answer is no, you won’t have to re-qualify at the higher rates when you renew your mortgage IF you stay with your existing lender. Here’s why that could be problematic.

• RateSpy’s Rob McLister says it’s the most ground-shaking mortgage rule change of all time.
• Rob Carrick says squeezing first-time home buyers is smart housing policy.

What’s your take?

This Week’s Recap:

On Monday I looked at car maintenance and asked how often should you service your vehicle?

On Wednesday Marie wrote about protecting your identity and personal information.

And on Friday I looked at how investors react when their portfolio loses money.

From the archive: Here are 30 signs you grew up in a frugal family.

Weekend Reading:

Is it time to put Gordon Pape out to pasture? The 81-year-old investment columnist’s recent piece in the Toronto Star argues that investors shouldn’t get hung up on fees because, “it’s how much you keep in your pocket that matters.”

While this statement is true at the basic level, the argument falls flat because investors cannot possibly know their future rate of return in advance. The only ‘known’ is the cost of the mutual fund or ETF, which, according to Morningstar research, is the biggest predictor of future returns. In plain language, the lower the fees, the higher the future returns (and vice-versa).

Pape cherry-picks three mutual funds that outperformed iShares Core S&P/TSX Capped Composite Index ETF over a 10-year period and uses this as ‘proof’ that low cost products don’t always beat high cost products.

Nobody is arguing that, Gord. What proponents of low-cost passive investing are saying is that it’s nearly impossible to identify those outperforming funds in advance. That’s why most investors would be better off with a low cost indexing strategy, which is guaranteed to outperform the vast majority of similar, yet higher cost, investment products.

In an epic rant on the fragile investor psyche in America, Downtown Josh Brown tells us to ‘just own the damn robots‘.

Morgan Housel says accepting that investing is made up of both precise facts and theories of maybes is the hardest thing for investors to grasp.

Steadyhand’s Tom Bradley says embedded commissions for investment advisers are going the way of the dodo and here’s why it’s about time:

“As this important issue drags on, I have a message for other senior executives. It’s time to break the silence and call off the fight. Trailer fees are going the way of the dodo bird. Use what remaining firepower you have to bargain for a long phase-out period. And then look forward to a time when conflicts of interest are easier to avoid and you have better relationships with your clients.”

Justin Bender goes under the hood of iShares All World ex Canada ETF (XAW) and explains when it makes sense to hold one global ETF and when to break it up into its three separate parts.

A good one from A Wealth of Common Sense blogger Ben Carlson – how to invest at all-time highs.

Now here’s another Common Sense Investing video with Ben Felix, which explains how the Tax Free Savings Account really works:

Financial planner Jason Heath answers a reader question about how best to plan when your income varies widely.

Two new books advise retirees to embrace more risk in their portfolios by upping their allocation to equities.

Are car dealer extras a bad deal? A Globe & Mail reader asks how to get out of his car’s multiple protection plans.

Michael James takes issue with home ownership cheerleaders using simple, yet misleading, claims about the investment value of owning a home.

Finally, the Luxe Strategist says she wasn’t born a saver, but here’s how she learned.

Have a great weekend, everyone!