The new mortgage stress test

In mid-October, the Office of the Superintendent of Financial Institutions (OSFI) released new guidelines for the mortgage industry.

The new rules indicate that uninsured buyers, those with a 20 per cent or more down payment, will have to qualify at 2 per cent higher than their contractual mortgage rate. Previously this stress test applied only to mortgages with less than a 20 per cent down payment. On a contractual mortgage rate of 3.29 per cent, for example, the borrower must now qualify for 5.2 per cent. As a result, some buyers’ purchasing power could be reduced by up to 20 per cent. For example, if your original budget was $500,000, you are now qualified for a home price of $400,000.

Many pre-sale buyers were extremely worried about the recent announcement and according to a study by the Canadian Home Builders Association, nearly 11 per cent of purchasers would not be able to obtain a mortgage upon completion of their units at these new stress test rates.

Fortunately, purchasers who have been pre-approved from a federally regulated institution to buy a pre-sale home prior to Jan. 1, 2018 will be grandfathered in under the mortgage rules in place at the time of signing their contract. We anticipate a very busy year-end for November and December, as entry-level home purchasers lock in their contracts with the current mortgage regulations.

The new regulations are a safeguard to ensure a stable housing market and mitigate the housing crisis that took place in the U.S. back in 2008. Canada has one of the highest debt-to-income ratios of G7 countries, so the changes will encourage buyers to reevaluate their budget and purchase homes they can meet the mortgage payments for even if interest rates increase in the near future.

Other changes also include prohibiting co-lending arrangements that are designed to circumvent tighter lending requirements. This means that parents co-signing their child’s mortgages will not be as relaxed as in the past.

After this new regulation was announced, buyers may feel the urgency to purchase homes within the next few months, especially first-time homebuyers. However, home seekers should not rush this process, as it is a significant investment and a major life event.