New Stress Test – Yes and No…

This is a YES because BANKS now have a new stress test for their portfolio.

The new stress test is about loan-to-income (LTI) and that each bank will be assessed at how much their book of business (number of mortgages) have an LTI above 4.5 times.

Basically, if borrowers have an income of $100,000, the mortgage must be $450,000 or lower.  However, this doesn’t mean all mortgages must abide by this new LTI stress test. It just means that the banks will on notice that they are only allowed a certain percentage of their mortgages to be above this stress test. 

The regulator said that this test is intended “to prevent the buildup of highly leveraged loans during low interest rate periods.”

This is a YES and NO because it’s generally not for individual borrowers.

This test is not for individual borrowers and individual files should be OK with LTI above 4.5.

However, it’s very possible that lenders pick and choose who they allow to have a mortgage higher than their LTI allowed ratio. i.e. each lender is going to have a certain number of mortgages they are allowed to put into a “non-conforming” bucket, and if that bucket is full, and even if a borrower’s file works and is under the 44% TDS ratio, the lender could decline it.

Right now, a $100,000 income can get a mortgage $465,000 or 4.65 times income, which is above the LTI allowed threshold. It’s not too high above it, but it would go into that “non-conforming” bucket.

Now, this is based on a stress test of 7.49%. If the rates go down, and the stress test becomes 5.5%, the mortgage would shoot up to $570,000, or 5.7 times income, which would be way over the allowed ratio. So, less of an issue currently, but may become more problematic later.

Long story short, this new stress test will make it so that some lenders who have been constantly *abusing* the ratios allowed (approving files that are way above debt to income limits), will now have to cut back on their approvals.

There’s no word yet on which banks will be affected most and/or if these “buckets” will be filled at all. It’s possible that this is a “nothing-burger” because the share of files above the standard LTI is quite small to begin with.

If you have more questions, please let me know. Here to help 🙂