Shopping for a Mortgage?
A Stricter Stress Test is Likely on the Way
The government has introduced an increase to the mortgage stress test. If you’re in the market for a mortgage over the next several months, you’ll want to read on.
Several new mortgage changes are coming down the pipeline that could affect your ability to qualify for a loan. Below we cover these changes and how they may impact you.
Reasoning
The real estate market is overheated causing prices to increase at an unprecedented fashion. Bidding wars are causing people to stretch affordability to their limits. People have to be in a position that they can carry their mortgages into the future when interest rates eventually go up. A large amount of mortgage defaults can put our financial institutions in financial peril. We saw this happen in 2008 when many financial institutions collapsed in the United States. This lead to a major down turn in the world economy. OSFI (the Office of the Superintendent of Financial Institutions) is planning to take action. But at the same time, they mustn’t do anything that could undermine Canada’s economic recovery during and after the pandemic.
This is their attempt to calm down overheated markets.
A Stricter Stress Test (Potential impact: medium for uninsured mortgage borrowers)
Last month, Canada’s banking regulator proposed changes that will tighten the stress test for uninsured mortgages (those with a down payment or equity of 20% or more).
The Office of the Superintendent of Financial Institutions unveiled its proposal that would see the current qualifying rate rise from 4.79% today to 5.25% starting June 1. OSFI said it would also “revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment.”
Experts calculate that the tightening will result in a reduction in purchasing power of about 4%. In other words, if you can qualify for a $500,000 mortgage today, after June 1 that will be reduced to $479,000.
Most uninsured borrowers who are well-qualified shouldn’t have a problem meeting the new qualification criteria, but if you’re currently near the limit of your borrowing capacity, you’ll want to run the numbers with me to ensure you can still qualify.
Vacancy Tax for Foreign Buyers (Potential impact: none for Canadian residents)
Despite calls for the federal government to rein in house price growth, Finance Minister Chrystia Freeland’s first budget was absent of any significant measures aimed at cooling the housing market.
Switches/Transfer
If you purchased your home before October 2016 and want to switch your mortgage to a new lender, the benchmark rate for qualification doesn’t apply.
Preapprovals
You must make your purchase before June 1st in order to qualify under todays stress test of 4.79%.
Purchases
Purchases with fully accepted Agreements of Purchase and Sale prior to June 1, 2021 will be grandfathered into the current stress test, as well.
More Rule Changes to Come?
It’s widely expected that the Department of Finance will eventually announce a tightening of the insured stress as well test to bring it more in line with the uninsured proposed changes, This would apply to those obtaining a mortgage with a down payment of less than 20%. Refinances already need to have minimum 20% equity in their home.
There’s been no confirmation as of yet, however when OSFI released its revised stress test proposal the Minister of Finance said this: “We will continue to monitor housing market conditions across the country. To inform potential steps the government may take, we will closely examine the results of the consultation announced by the Superintendent of Financial Institutions.”
Do you have a renewal coming up or are you considering a refinance? Are you concerned about the potential impacts of the stress test changes? The key is having all of this new information in hand before embarking on the process, and I’d be happy to review the changes with you.
Call me today!
Anne Martin
(795) 791-6683
[email protected]
