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What to expect with new mortgage stress test

Jan 23, 2018

A new Mortgage Stress Test: Are you ready?


Adapted from Metro Life

Starting Jan.1, 2018 homebuyers were faced with a mortgage stress test incorporated by the Office of the Superintendent Financial Institutions to cool the overheated housing markets.
The test requires the qualifying rate for an uninsured mortgage to be the greater of the Bank of Canada’s benchmark rate (presently 4.99%) or the negotiated rate by the homebuyer plus two percentage points.

A report by Mortgage Professionals Canada estimates the new rules will mean buyers will be able to afford to borrow 20% less than under the previous rules.
Paul Taylor, CEO of Mortgage Professional Canada, states that paying off all other debts you might have is a good strategy as these will have a direct affect on qualifying for a mortgage.
Some experts had encouraged people to get a pre-approved mortgage before Jan.1 and some lenders offered an exemption to the stress test if you bought a home within 120 days of the pre-approved mortgage. James Laird, the co-founder of financial comparison platform Ratehub, said he thinks all levels of buyers will have to make adjustments to their plans. If you can’t delay buying in order to build up a larger down payment you may have to accept that you have to go for a little less house than previously. In some cases you may need to ask your parents for help to qualify where previously you had secured a mortgage on your own. You may be further ahead and save for a larger down payment and by the time you get into the market house prices may have dropped.

But some exceptions exist....

There are some exceptions to the new rules. If you signed a contract for a pre-construction condo before Jan.1 you will fall under the old rules. If you bought before Jan. 1 but close afterwards as long as you have a firm offer you will also fall under the old rules. You can sidestep the test if you go to an alternative lender , like a credit union because they fall outside of the regulations covering banks and other traditional lenders. On the down side, if you bought a home before Jan.1 to avoid the new stress test , when your mortgage comes up for renewal and you choose to switch lenders , you will have to qualify under the new policy. You could also see your bank issuing slightly higher rates at renewal time if they know you won’t qualify to take your mortgage elsewhere. Not good news.