New Mortgage Stress Test
By Fraser Taylor, CFO
On October 17, 2017 the Office of the Superintendent of Financial Institutions Canada (OSFI) revealed a new set of rules known as a “Stress Test”, that may reduce the mortgage amount that financial institutions are able to lend to home buyers.
What is a Stress Test?
When qualifying for a mortgage, the financial institution evaluates, among many factors, the home buyer’s ability to make mortgage payments at the interest rate on their future mortgage. The new Stress Test requires that the home buyer qualify at a rate that is 2% higher than the interest rate the mortgage will be provided (or at the Bank of Canada 5-year bench mark rate if it is greater, currently at 4.89%).
For example, if the approved mortgage rate is 3.1%, then the homebuyer’s income needs to be sufficient to qualify for a mortgage that has a 5.1% interest rate. It doesn’t mean the homebuyer pay’s interest at 5.1%, they just need to quality at this Stress-test rate.
Who is affected?
Any home buyer looking to obtain uninsured mortgage financing from a federally regulated lender with a down payment of more than 20%. Please note that the above Stress Test was already in place for mortgages where there is a down payment of less than 20%.
When does it take effect?
Any mortgages qualifying on, or after, January 1, 2018. If a home buyer obtains a firm mortgage approval before January 1, 2018 they will not be held to the “Stress-test” even though the mortgage funds will not be distributed until after January 1, 2018.
One watch-out is that most financial institutions will normally only provide firm approvals 3 to 6 months ahead of the sale closing.
Are there any exceptions?
Any mortgage renewals, if staying with the same financial institution would be exempt from this stress test.
Have a great weekend,
Cedarglen Home
Sources
http://www.rbc.com/economics/economic-reports/pdf/canadian-housing/housing_OSFI_Oct2017.pdf
http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b20_dft.aspx