The New Mortgage Stress Test

OSFI (the Office of the Superintendent of Financial Institutions), the bank regulator, has finally confirmed last week that all borrowers have to now undergo a “stress test” when it comes to new mortgages.

Previously, this stress test was only in place for insured mortgages (borrowers who have less than 20% down) and for clients who wanted a term that was not a 5-year fixed.

What all this means is that any borrower who would have been approved with 20% down on their 5-year fixed rate, will now have around a 20% decrease in affordability.

Starting January 1, 2018, the new “Stress Test” on low-ratio mortgages will be the GREATER of the Bank of Canada qualifying rate (currently 4.89%) or 2% above a client’s contract rate.

Financial Post    |    CBC    |    OSFI Press Releases

The Potential Immediate Impacts
– As at January 1, 2017, there will be an approximate 20% decrease in affordability for some buyers.
– This decrease in affordability may push people to variable rates due to easier qualification (a variable rate of 3% would qualify at 5%, whereas a fixed rate of 3.5% would qualify at 5.5%).
– This may pushing mortgage borrowers to non-federally-regulated institutions (credit unions, higher interest rate lenders, etc.).
*These rules do not affect credit unions at the moment.

What Can You Do?
1. Understand how these factors will affect you! Contact any one of us and we would be happy to go over your options.

2. If required, try and purchase a home in 2017, prior to the new rules coming into place. Pre-approvals based on current affordability will not hold past January 1st if you don’t have an accepted offer on a specific property.
*If you do find a home before January 1st and we submit our application before January 1st, you will qualify on the old, higher affordability, even if your purchase happens in the new year.

3. Feel comfortable that we have you covered, that we have access to other financial institutions such as credit unions, and you can always contact us, or anyone on our team for quick answers to your questions.

Some Frequently Asked Questions

What About Provincially Regulated Institutions, such as Credit Unions
Credit Unions are not obliged to follow the new stress test rules. It is possible that no change will occur to affordability for people who borrower from credit unions because as of now, they have not stated whether they will change their policies to be in line with the banks and other federally regulated institutions.

Does this Affect Amortization?
This new policy from OSFI does NOT have an amortization component. The lender can still set the qualifying amortization to their own specific policy (eg, 25, 30 or 35 years).

Do I Still have the Option To Refinance My Home?
Yes, homebuyers will still have the ability to refinance up to 80% of the value of their property. You will have to pass the same stress test which is the higher of the Bank of Canada Rate (currently 4.89%) OR the rate from the lender plus 2%.

If my contract was written prior to Oct. 17, 2017 or prior to Jan. 1 , 2018, will I qualify using the old or new benchmark rules?
This depends on the lender. Some lenders will use current rules up to Jan. 1, 2018. Likely there’ll be a submission deadline around Dec. 28., 2017. DLC will continue to update as more information arises.

When the stress test for HIGH RATIO (less than 20%, insured deals) was introduced in 2016, consumers were grandfathered under the old rules (no stress test) if the real estate contact date was written before the start of the stress test rule.

What if I don’t qualify at best rate lenders?
The qualifying stress test rule will also apply to alternative lenders (also know as B lenders) who are governed by OSFI. Any federally regulated lender will have to adhere to the stress test ruling.

To counter this much higher qualifying rate, some alternative lenders will have the discretion to revisit their own income-to- debt-ratio (TDS) calculation policies. For example, presently these alternative lenders have the ability to approve mortgages with a 50% TDS (banks are more like 42% on average). Under the new stress test rules, alternative lenders will most likely have to increase the TDS policy to a higher figure to offset the higher qualifying mortgage payment under the stress test rate calculation. This means that a given income would by approved for a higher mortgage amount, even with the new stress test.