Will your mortgage pass the (stress) test?
If you’re on the hunt for a new house, be aware that the 2% stress test and rigorous income verification may have changed your personal financial picture.
The Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of its Residential Mortgage Underwriting Practices and Procedures, which will come into effect January 1, 2018.
The new rules target borrowers in the uninsured mortgage market, making it more difficult for those with more than a 20% down payment to qualify for home loans. The measures, known as B-20 guidelines, require lenders to test a borrower’s ability to pay at the greater of the Bank of Canada’s five-year benchmark rate or 2 percentage points higher than the offered mortgage rate.
The effect of the changes will be huge: a 20% decrease in affordability. This means a first-time homebuyer will be able to buy 20% less house if they have at least 20% downpayment.
The revision to the stress test requirement is intended to dampen incentives to take variable or shorter-term fixed rate mortgages. Broadening the stress test will likely further slow housing activity, depressing demand by 5 per cent to 10 per cent once implemented.
Although the changes take effect in January, in the notes on implementation, it says Federally Regulated Financial Institutions are expected to comply with the principles and expectations of the guideline immediately (where possible).
The guidelines will take effect Jan. 1, 2018 and apply to new mortgages as well as mortgage renewal applications, if borrowers switch lenders. Financial institutions won’t be obligated to apply the test at mortgage renewal for existing borrowers, although they may choose to do so, OSFI told Global News.
The main effect will be felt by first-time home buyers. “The new rules will likely also push some buyers toward provincially-regulated mortgage lenders, such as credit unions or private lenders, which are not affected by the OSFI changes.”
Joe Busillo, Mortgage Agent with YourMortgageYourWay.ca
If a first-time homebuyer doesn’t pass the new stress test, they have 4 options:
- Put down more money on their down payment to pass the stress test
- Decide not to purchase the home
- Add a co-signer onto the loan that has income as well
- Buy a home of lesser value to ensure they meet the new stress test requirements
Important caveat: if on renewal you stay with your existing lender, then you don’t have to pass the stress test again.
However, if you change lenders at mortgage renewal time, you may have to pass the stress test. This has not been defined or addressed in the new OSFI rules. According to Joe, “these changes may negatively impacting the borrower’s ability to competitively shop around for the best rate when renegotiating.”
If you’re thinking about refinancing, now is the time.
And if you’re a first-time buyer, make sure you understand what you qualify for using the new regulatory rules, and get a pre-approved mortgage before you start house-hunting.
Benefits of a preapproval include:
- Find out what your clients can afford to buy so you can streamline the house hunt
- Lock in rates for 90-120 days
- Check credit and clear up any issues
- Let the clients know what to expect from the mortgage process
Pre-approve today. It’s a quick online application followed by a phone consultation. calculate the impact of the mortgage stress test on your home affordability.
For first time home buyers AND borrowers looking to take advantage of the equity in their home for consolidation and or investment purposes should be aware of the new stress test and more stringent mortgage rules. If you have any other questions, give us a call and we’ll walk you through the mortgage process or visit yourmortgageyourway.ca/get-pre-approved/