04/13/2021
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More Changes Could be on the Horizon: New Proposed Mortgage Stress-Test on the Table for June
Late last week Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), made some waves when they announced that they propose to raise the mortgage stress test to 5.25% for uninsured mortgage loans. This change could come into effect June 1, 2021.
What does this mean for would-be home buyers? Less purchasing power for some. Raising the qualifying rate for potential buyers could mean qualifying for a lower purchase price.
The last round of mortgage rule changes (in 2018) introduced the “stress-test” for uninsured mortgages and was preceded by a flurry of last-minute buying. It is anticipated this latest announcement could once again spur this type of activity; heating up an already feverish spring real estate market.
The stress-test was implemented as a means of ensuring borrowers do not bite off more than they can chew, and is the metric used to qualify would-be home buyers for a mortgage loan. Potential borrowers must demonstrate they have the ability to cover their mortgage payments in the event rates rise much higher than when they apply for the mortgage.
There were rumblings that OSFI was planning to revisit the “stress-test” benchmarks prior to the Covid pandemic. The latest announcement comes amidst soaring housing prices (the average price of a home in Canada has risen 25%).
It is important to remember that these proposed changes do not increase actual costs to borrow, and because the rules apply to all Canadian borrowers, the playing field remains a level one.
What does qualifying look like now?
Insured borrowers (those with between a 5.00-19.99% down payment):
These borrowers must qualify at the 5-year benchmark rate; currently sitting at 4.79% and are subject to a Mortgage Default Insurance Premium (aka “CMHC fee”).
Uninsured borrowers (those with 20% or more down payment):
These borrowers are not required to pay a default premium and must qualify at the Bank of Canada benchmark rate (currently 4.79%) or the contract rate + two percentage points; whichever is greater.
What could qualifying look like come June 1?
Uninsured mortgages will be required to qualify at the new maximum stress-test rate of 5.25%.
This is best summed up by chief economist Doug Porter, “Think about it this way: If Ottawa gave every renter in the country a $10,000 gift card that could only be used to buy a new home, the only winner would be the home sellers, not the buyers, because every home price in the country would go up $10,000. Think of this as the reverse. They are possibly taking away a bit of buyer power, but that hurts sellers mostly.”
He goes on to say that if a potential buyer’s maximum mortgage had previously been $1 Million, they could expect it to be $955,000 after any rule changes.
It is important to remember that these are proposed changes. If you are concerned with the change to your purchasing power please contact us to run the numbers for you. Chances are the impact will be less than you imagine. We will look at the whole picture and build a mortgage to meet your needs, whether that’s for the home you purchase today or the one you purchase after June 1.
Talk to a licensed professional today - drop us a message here or visit www.axiommortgage.ca/applynow
