What the Proposed Stress Test Change Means to You
The country’s central bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), just announced proposed changes to the mortgage stress test level. The regulator was debating whether changes should be made during 2020, but halted those plans once the pandemic hit.
The mortgage stress test is a tool used by lenders to assess whether a borrower looking to buy a home can qualify for a mortgage. Borrowers must be able to prove not only that they can pay the mortgage interest rate, but also that they can continue to make payments in the future if the interest rate increases. Homebuyers are required to show they can either make payments at 2 percentage points higher than the mortgage rate or at the five-year posted fixed-rate from Canada’s largest banks, whichever of the two is greater. In practice, borrowers have been asked to prove they can qualify for the five-year fixed rate based on their income-to-debt ratios.
When the stress test rules first came into effect at the beginning of 2018, it resulted in slowing down the incredibly hot real estate market at the time. After the rules were first tabled at the end of 2017, there was a rush of homebuyers to the market looking to secure mortgages before they would be required to pass a stress test.
Today, the average posted rate from the country’s largest lenders is 4.79%. The proposal entails raising the mortgage stress test level either to 5.25% or, as was already the case, 2 percentage points higher than the market rate, whichever of the two is greater. These changes will make it more difficult for borrowers to get a loan as they will have to be able to show they have the financial capital to pay for a mortgage at a higher rate. In turn, there would be less qualified borrowers in the market, thereby potentially causing a decrease in the housing demand that has been soaring for over half a year now. The changes are currently being reviewed by market stakeholders, and are set to come into effect by June 1 if they are passed.
While the average posted fixed-mortgage rate sits at 4.79%, many homebuyers today are able to secure loans at half that price, especially if they work with a mortgage broker. Steven Tulman, the President of Clover Mortgage, explains just how quickly a borrower can become overwhelmed with payments:
“At an interest rate of 2% for a mortgage amortized over 30 years for $500,000, monthly payments would total $1,846.02 per month. If the interest rate was to increase to 4.79%, which is the current average posted rate, monthly payments go up to $2,606.09. That is $760.07 extra per month, or a 41% increase in monthly mortgage spending. The new stress test rate being proposed, 5.25%, would make monthly payments climb even higher to $2,743.54. This will further limit the mortgage amounts that borrowers can qualify for turning more borrowers towards alternative lenders or smaller less expensive or more remotely located properties”
Along with the higher stress test rate proposal, OSFI also announced it intends to review the stress test rate on an annual basis to confirm whether it is suitable for homebuyers and sellers in light of market conditions. These changes have been announced amid news that average home prices in Canada have soared by 25% year-over-year in February 2021.
As a result, OSFI is coming under increased scrutiny to help make sure homebuyers, as well as mortgage lenders, continue to be protected. With the current housing market conditions including high prices and low mortgage rates, lenders are currently taking on substantial financial risk. OSFI has a duty to ensure banks are protected from defaulted loans.
Although the changes may make it more difficult for some borrowers to secure a loan, the net effect may indeed be a positive one. When the changes are made, some borrowers might have more difficulty securing a loan, however, the proposed changes are designed to pressure home prices to fall. This may benefit homebuyers in the future, making it more affordable overall to purchase a home.
In the meantime, much like the spur in home purchasing that occurred in 2017 before the stress test rules were adopted, the present trend of booming prices and sales is set to continue. Borrowers are likely to flock to the market to qualify at the current stress test level before it may increase in June.
If you would like to get into the hot real estate market and qualify at the current stress test levels before the June 1 deadline, an expert mortgage broker at Clover Mortgage can help you. Our experienced brokers are experts when it comes to determining which of the many mortgage products available to you will best suit your needs. We will work around the clock to get you financing for your dream home!