Changes to the stress test for mortgages
The Superintendent of Financial Institutions (OSFI) began hinting at changes to the stress test in Jan 2020. Those changes were put on hold as it became clear we were entering uncharted territories with a global pandemic.
Welcome to April 2021. While the pandemic is still a part of our daily lives, the real estate market has been on fire. OFSI has recently announced their new proposal for a change to our qualifying rate. The proposed change is set to come into effect on June 1.
Who will this affect?
Clients who are needing mortgage financing who have 20% (or more) down or who are looking to refinance their mortgage, will now have to qualify at a stress test rate of 5.25%.
This change will NOT affect clients who have less than 20% down. That qualifying rate will stay at 4.79% for now.
What does this mean in terms of dollar figures?
Assuming the following:
- Combined family income of $130,000
- Property taxes of $4,500 annually
- Little to no debts in this scenario
- 20% down
- 30-year amortization
Under current rules, I could qualify this family for up to a 900,000 purchase with a 180,000 (20%) down payment.
Under the proposed new stress test of 5.25%, using the same down payment of 180,000 (will end up slightly more than 20%) this same family would only qualify for up to 860,000 purchases.
This is an overall decrease of approx. 4 – 4.5%. If you are currently house hunting, using this % will give you an approximate idea of how the new rules will affect you directly. However, it’s always best to get in touch with your mortgage professional to discuss your specific file.
Who will be the hardest hit?
Clients who will be hit hardest by these changes will be middle-class Canadian families. Those who are looking to upgrade from their starter home, have built up some equity over the last few years, and want to move into something that better suits their needs.
It will be interesting to see how lenders adjust to this new potential change. When the initial stress test rules were put in place, we did see that many lenders were looking for ways to help ease the impact of the new rules. For example, child tax benefits were now allowed to be included in our income qualification.
As well, in the past few years to mitigate this change, we have seen parents co-signing for their adult children in record numbers. We have seen more gifted down payments (early inheritances) to try and balance out the stress test changes. Families have also been selling their individual properties and merging their homes allowing young families to use their parent’s retirement income to help with qualifying power.
Adjusting to the proposed changes
With all the ways the new rules affected Canadians, we persevered and have adjusted. I have no doubt the same will happen this time.
As these changes are still ‘proposed’ there will be a lot more information to come in the upcoming weeks, but it is extremely important that you move forward as if the changes are happening. If you are currently shopping (with 20% or more down) or considering refinancing your home, it’s extremely important to connect with your mortgage broker to see how this will affect you personally.
When it comes to mortgage financing, there is no such thing as being over-prepared.
All the Best!