What The Mortgage Stress Test Means For Homebuyers

The Office of the Superintendent of Financial Institutions (OSFI) has been a popular topic around water coolers these days. Ever since the new mortgage rules were announced, everyone and their mothers have been talking about the new mortgage stress test that came into effect January 1, 2018. Although the new mortgage rules have been discussed a great deal in the media, there remains a lack of clarity about the mortgage rules.

Let’s take a closer look at the new mortgage rules and how it affects homebuyers.

Are You Putting Down 20 Percent?

Since January 1, 2018, if you are buying a home and plan on putting down a 20 percent deposit then you are impacted by the mortgage stress test. Prior to January 1st, 2018, you had an easier time qualifying for a mortgage.

For example, let’s say you choose the safety and security of a five-year fixed rate mortgage. Under the old mortgage qualifying rules, you would only have to qualify at the contract rate at your lender. So, if the going rate for a five-year fixed rate mortgage was 3.49 percent, then that’s the rate you would have needed to pass.

But with the mortgage stress test, you now must pass a tougher test. You must qualify at the greater of your mortgage rate plus two percentage points and the Bank of Canada’s five-year benchmark rate. In the example above, if the Bank of Canada’s five-year benchmark rate is 5.34 percent, you would have to qualify at 5.49 percent, since it is the higher of the two.

Why The Banking Regular Introduced The Stress Test

Why did the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator bring in the mortgage stress test? We have seen a lot of changes in the housing market in the last couple years, including Ontario’s Fair Housing Plan, higher mortgage rates and B.C.’s 30-point plan for housing affordability.

OSFI brought in these rules because it is concerned with the level of household debt Canadians are carrying. As such, OSFI wants you to be able to handle higher mortgages rates when they finally arrive. Although it is tougher to qualify at a rate two percentage points higher, these are the new qualification rules you will need to live by.

The government and banking regulators just need to be careful about introducing too many housing market changes within a short period of time, as housing is a major driver of economic growth. Slowing down the housing market could weigh on the Gross Domestic Product (GDP) numbers in the coming months.

How Do The New Mortgage Rules Impact How Much Home I Can Buy?

If you are planning to buy a home in the near future, you are probably curious about how the mortgage stress test rules affect you. Under the new mortgage rules, homebuyers on average lose about 20 percent of their purchasing power. For example, if you qualified to spend $500K on a home under the old rules, you would only be able to spend about $400K under the new rules.

If you are purchasing a home in place with lower home prices like Regina or Winnipeg, you probably will not feel much impact from the new mortgage rules since most homebuyers do not stretch themselves as much financially there. However, if you are buying in more expensive real estate markets like Toronto and Vancouver where every dollar counts, you will certainly feel the pinch. You may be forced to move a rung down the property ladder. Under the old mortgage rules, you could have afforded a detached home, but under the new rules you may only be able to afford a townhouse or condo.

Another option is to buy a home further outside the city where your home-buying dollar typically stretches further. Both may not be ideal, but you may have to make sacrifices under the new mortgage rules if you want to make your home buying dreams become a reality.

Will The Stress Test Slow Down The Real Estate Market?

Based on housing market statistics, it seems many homebuyers rushed into the housing market towards the tail end of 2017 to avoid the new mortgage rules.

The first half of 2018 was slower compared to the first half of 2017, but that’s not really a fair comparison. The first quarter of 2017 can be best described as “gangbusters” in Toronto. With all signs pointing to a decent fall market, and with interest rates still low, now remains as good a time as ever to get into the real estate market.

Other Things You Need To Know About The Stress Test

Only federally regulated lenders are required to stress test your mortgage. That means credit unions, which are provincially regulated, do not need to impose the stress test. If you are having trouble qualifying for the mortgage size you had hoped, it might be worth exploring credit unions. (Although some credit unions are choosing to stress test their clients.)

Homebuyers are not the only ones impacted by the stress test. Is your mortgage coming up for renewal in 2018? If you are hoping to shop around for a mortgage, you will need to pass the stress test if you switch lenders. Your lender is aware of this, so you probably should not expect to get the best mortgage rate upon renewal.

Looking to refinance your mortgage? Again, you are affected by the mortgage stress test. Common reasons you might want to refinance include consolidating debt or borrowing the equity in your home for a major renovation. If your debt ratios are already near the maximum, you might have a difficult time refinancing under the new rules.

Even if you have a 20 percent down payment, you might consider only putting 19 percent down on a home you are buying. Here’s why. Not only can you avoid the strict new mortgage stress test, mortgage rates tend to be lower on Canada Mortgage and Housing Corp. (CMHC) insured mortgages (unless you’re putting down at least 35 percent).

Sean Cooper is the bestselling author of the book, Burn Your Mortgage. Sean is also a mortgage broker at https://mortgagepal.ca. On Twitter @BurnYrMortgage, email SeanCooperWriter@gmail.com