The Office of the Superintendent of Financial Institutions (OSFI) confirmed today that borrowers will be facing a higher stress test for insured and uninsured mortgages, beginning on June 1.
Starting next month, just over 1 week away, homebuyers will have to show they can afford the greater of either Bank of Canada’s new five-year rate of 5.25% or 2% higher than the mortgage rate they are looking to secure with their lender, whichever of the two is greater. To qualify presently, borrowers have to prove they can make payments at the higher of either the Bank’s 4.79% rate or 2% higher than their contracted mortgage rate.
This change applies to both uninsured mortgages, where a borrower contributes at a minimum 20% of the purchase price as a downpayment, and to insured mortgages, where a borrower makes a downpayment of less than 20% on a property they purchase at a price below $1,000,000.
Plans to hike the stress test rate were first introduced as a suggestion in April, when the OSFI announced they were looking for feedback from stakeholders on whether to change the rate or leave it at its current status.
The bank regulator justified their decision on the basis of increasingly risky conditions for borrowers and lenders in the booming housing market. With surging home prices, borrowers have been taking on higher and higher levels of debt, which could be risky for many borrowers and lenders if economic conditions change.
Alongside the more stringent test that makes it harder for borrowers to qualify, the OSFI also committed to reviewing the test at the end of every year to ensure that it continues to sufficiently protect borrowers and lenders from financial risk.
The stress test was first put into practice at the beginning of 2016 when the surging housing market was causing greater levels of debt and risk. With the housing market continuing to soar throughout 2019, the OSFI had announced in January of 2020 that they would review the mortgage stress test, and decided to lower the qualifying rate during the first year of the pandemic.
For the average household earning approximately $100,000 a year in income, the changes to the stress test can reduce their buying power by up to 5%. That means that based on the current stress test rate of 4.79%, $100,000 in income per year will qualify the average borrower for a mortgage of up to $620,000 with a traditional institutional lender. With the new stress test at 5.25%, that same borrower will only qualify for a mortgage of $590,000 through a traditional lending institution. That’s roughly $30,000 less of a mortgage for every $100,000 of annual household income.
Here is a chart to showcase a different example comparing a borrower's purchasing power with the current mortgage stress test to how their purchasing power will decrease under the new stress test coming into effect on June 1, 2021.
|Current Stress Test||Stress Test Effective June 1, 2021|
|30 Years||Amortization||30 Years|
It’s official -- stress test changes are just around the corner, making it more difficult to qualify for a mortgage. Do not miss out on your chance to qualify and get your dream home at an excellent interest rate.
An expert mortgage broker at Clover Mortgage will work tirelessly to secure your mortgage rate as soon as possible. At Clover Mortgage, we have direct access to dozens of lenders, helping you get a loan fast. Contact Clover Mortgage for all of your mortgage needs. Call us today at 416-674-6222or email us at firstname.lastname@example.org to qualify for a mortgage before the stress test rate goes up.