Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) is moving forward with a new change to the Stress Test for uninsured and insured mortgage products.
This new change makes it slightly more difficult for those who are planning to buy or want to refinance.
When you go to buy a house or do a refinance, I run your application through what’s called the Stress Test. This means I use a higher, qualifying rate as opposed to the actual interest rate you’ll pay on your mortgage.
Why?
This qualifying rate tests your ability to pay for a higher mortgage payment if rates were to go up in the future. Today, I use the qualifying rate of 4.79% for both insured and uninsured mortgages even though you’ll actually be paying around half that rate when the mortgage is finalized.
The new qualifying rate for these borrowers will be +2% of the contract rate or 5.25% (whichever is greater). We will end up almost always using 5.25% which is almost always the greater of the two.
Current Mortgage Stress Test
Family Income: $100,000 per year
Amortization: 25 Years
Qualifying Rate: 4.79%
Property Tax: $3,600 per year
At the current rate for the Stress Test, this family would be approved for roughly a $440,000 mortgage amount, which with 20% down is a $550,000 purchase price.
Proposed Mortgage Stress Test
New Qualifying Rate: 5.25%
* All other variables remain the same
At the new qualifying rate, this family would be approved for roughly a $425,000 mortgage amount, which with 20% down is a $531,000 purchase price.
So in this example, our family qualifies for about $15,000 less or about 3.6%.
Why The Change to The Stress Test?
You’ve likely heard that interest rates are really good right now, and that statement isn’t wrong. In the wake of this last year, the government and lenders have made it really easy to borrow money for both insured and uninsured mortgage products.
However, this has caused what the regulators are calling a “spurred frenzy” of people buying big homes. Their primary concern is that buyers are spreading themselves thin by buying too much house because interest rates are so low. This increases the risk that borrowers won’t be able to pay their mortgage in the future if and when rates go up.
These proposed tightening restrictions will reduce the borrowing power by less than 4% for a typical family if (and that’s a big if) buyers are putting down 20% or more.
What Do You Do With This Mortgage Rate Information?
The change goes into effect on June 1.
The number one thing you should do with this mortgage rate information is to reach out to your broker or if you don’t have one, get one. I'd love to help!
Let’s see where your financial situation is at and if you can qualify today for a mortgage. The sooner you reach out, the better!