In Q4 of 2017, we stressed the impact of what some might say was the most ground shaking mortgage rule change Canada has seen. Effective January 1, 2018, homebuyers who don’t require mortgage insurance — those with a down payment of 20% or more — must qualify for their mortgage at a higher rate. This new stress test doesn’t apply to people renewing their uninsured mortgage.
What is a stress test?
To put it simply, a stress test is subjecting prospective home purchases to a “What if?” scenario. Specifically, what would be the shape of a given homebuyer’s finances if Bank of Canada were to suddenly hike interest rates? Insured mortgages in Canada were already subjected to such tests, but they now apply to uninsured mortgages as well.
How high is the bar?
The rules will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate (now 4.99%) or the customer’s mortgage interest rate plus 2%, whichever is greater.
For example, if you were to get a mortgage with an interest rate of 3.5%, you now need to qualify to show that they can afford 5.5%.
What if the bar is too high?
The reality is, those who fail the test will need to look for alternative measures such as:
- Putting down more money (that you don’t have) on your down payment to pass the stress test
- Renting a little longer and waiting for your income to increase to be able to afford your dream home
- Looking for something cheaper on the market
If you were to buy a home worth $660,000 in 2017, this year you will only be able to afford a home worth $525,000. It’s more important than ever to contact us to see what your options are.
Why put buyers to a test?
The federal government is concerned about Canadians’ debt levels. Statistics Canada said in December 2017 Canadians owe $1.71 for every $1 they make.
In a publication from October 2016, when the first stress test was introduced, the Finance Department announced in their press release, “Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it.
Do the new rules affect you?
While those seeking to renew mortgages under existing terms will not need to re-qualify and be stress tested, but those who fall into the following categories will:
- Homebuyers with a down payment greater than 20%!
- Everyone who wants to access equity in their home to refinance; this includes my clients who want to keep their property, refinance, and/or buy another property.
- Everyone who is looking to refinance their mortgage in the near future.
We won’t see any of the real implications of the new mortgage rules until much later in 2018. Most lenders have been pre-approving buyers without qualifying them under the stress test and willing to hold that rate for 120 days. So we likely won’t see the true implications of the stress test until spring/summer of 2018.