On October 17, 2017 the Office of the Superintendent of Financial Institutions Canada introduced a new “stress test” to be applied by all federally regulated financial institutions for residential mortgage underwriting. This new requirement comes into effect on January 1, 2018.
The First Stress Test Applied to Insured Mortgages
The first “stress test” was put in place in October 17, 2016. It applied only to borrowers requiring a high ratio insured mortgage. That is, anyone with less than a 20% downpayment, had to qualify at the higher qualifying rate published by the Bank of Canada. This ruling, still in effect, has a qualifying rate of 4.89% that’s now changing to 4.99%. So even though your contract rate for a 5-year fixed mortgage might be 3.09% today, you must qualify for a mortgage at the higher qualifying rate, effectively reducing the mortgage amount you can borrow. The ruling did not apply to borrowers with a downpayment of 20% or more as their mortgage did not need to be insured.
The New “Stress Test” Affects Uninsured Mortgages
As of January 1, 2018 OSFI is setting a new minimum qualifying rate, or “stress test,” this time for uninsured mortgages. The OSFI guideline “now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year qualifying rate published by the Bank of Canada or the contractual mortgage rate +2%.
How The Change Can Affect Affordability
Example: a family in Niagara with an annual income of $80,000 has monthly debt payments of $150 on their credit card and $450 on a car loan. They have an $85,000 downpayment. Using an online affordability calculator, let’s see how much house they qualify for.
The Current Best Rate vs. the Qualifying Rate:
- At a current best contract rate of 2.84% for a 5-year fixed mortgage amortized over 25 years, they can afford a $402,942 home.
- At the new qualifying rate of 4.99% for a 5-year mortgage amortized over 25 years, they can afford a $339,488 home.
That’s a difference of $63,454 or 15.75%.
The Current Prevailing Rate vs. the Higher “Stress Test” Rate
- At a current prevailing rate of 3.09% for a 5-year fixed mortgage amortized over 25 ears, they can afford a $394,425 home.
- Adding 2% to the contract rate of 3.09% is 5.09%. As this is greater than the qualifying rate of 4.99%, this is the “stress test” rate to be used in this case.
At the “stress test” rate of 5.09% for a 5-year fixed mortgage amortized over 25 years, they can afford a $337,014 home.
That’s a difference of $57,411 or 14.55%.
Small Window of Opportunity to Qualify at the Contract Rate
Between now and January, buyers have a small window of time in which to purchase a home before the new “stress test” comes into effect. That is unless lenders decide to implement the test before the January 1st date. Of course the OSFI does not control unregulated lenders, and this new restriction can cause borrowers in that direction. One thing is for certain: the new rule will again definitely affect affordability.