New Mortgage Stress Test

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Mortgage Rule Change Announced for Buyers with 20% Down

So a new mortgage rule was announced this week, though it was one that we were aware was in the pipeline, so we’re not surprised.

Mortgage rules change all the time affecting different Buyers (trust me, as a self employed person I know this all too well), but this one is important because it affects anyone with over 20% down. The new mortgage rule is an interest rate “stress test” which forces Buyers to prove that they can afford an interest rate hike by qualifying at a higher interest rate. The buyers will still be paying the mortgage at the lower rate but the higher qualification rate will decrease their affordability during their approval.

The Office of the Superintendent of Financial Institutions (OSFI) made this change to ensure Buyers are prepared for a future interest rate hike, and without saying it explicitly, to cool the market.
Over the last few years, a ton of new mortgage rules have been released, including dropping the amortization period from 40 to 35 to 30 years, requiring at least 5% down, requiring 7.5% down between $500k and $1-million and requiring 20% down for anything over $1-million or for a second property, stress test for Buyers with less than 20% down and now a stress test for everyone, the foreign buyers property transfer tax, and more. So far, nothing has cooled the market, though Buyers expectations have certainly changed to adjust to the new reality. Take it from my own experience, it’s not fun to hear that mortgage rules have changed to decrease your affordability all the while prices keep increasing!
Our savvy mortgage broker, Eitan Pinsky and his Team, offers a little more information:
Starting January 1, 2018, the new “Stress Test” on uninsured mortgages (20% down or more) will be the GREATER of the Bank of Canada qualifying rate of 4.89% or 2% above a client’s contract rate.
The Impacts on Buyers may include:
– About 20% decrease in affordability for people with 20% down (for example, those who could previously afford close to $2-million are now down to $1.6-million, those who could afford close to $1.2-million are now down to about $1-million and those who were at $600,000 are now at $500,000)
– Increase in variable rate popularity 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%)
– Increase in borrowers considering non-federally-regulated institutions that don’t require the same qualifications (Credit Unions, etc.).
Unanswered Questions
– If a Buyer’s purchase contract was written prior to January 1, 2018 we assume that the old qualification rules are intact. We don’t know this for sure yet… When the stress test for high-ratio files was introduced last year, consumers were grandfathered into the old rules.
– Will more lenders start to do more creative financing with 35 year amortizations to qualify? There are currently three lenders we have access to that can…
– Will the government mandate that variable rate mortgages must be qualified at a higher rate than 2% over the contract rate? As the law is currently written, a more risky variable-rate mortgage would qualify at 4.99% (the higher of 2.7% plus 2% and 4.99%), whereas fixed rates would qualify at 5.2%+. This new rule would force people to take riskier variable-rate mortgages to qualify for a larger mortgage – this is an unintended consequence of the new Stress Test.
What Can You Do?
– talk to your mortgage broker so you can understand how this mortgage change will affect you.
– if you are under contract to purchase a unit before January 1, 2018, these rules won’t affect you
Let Eitan and his team know if you have any other questions and get re-approved so you can understand how these changes will affect you.

As for the Real Estate Market itself market, we might see:

  • Potential for a price decrease at the top of the market (where properties are most expensive) yet finding more Buyers into the “middle” where you normally find townhouses or entry level detached houses, creating even more competition
  • Buyers moving out of the Vancouver to find a “family sized” home within their price point
  • Buyers eager to buy this fall prior to the changes taking place or a “wait and see” attitude which will lead to a slow November and December (this happened after the Foreign Buyers Tax was announced, then the market picked up again in January).