The New Mortgage Stress-Test Is Here
Effective June 1, Canadian homebuyers are now facing a tougher mortgage stress test that will decrease the buying power for many borrowers.
The change in rules, announced in May by OSFI Canada’s banking regulator, was in response to an ongoing overheated housing market.
What does this mean for me as a borrower?
The new mortgage stress tests affects all Canadian homebuyers purchasing a new home, refinancing an existing mortgage, switching lenders or transferring their mortgage*.
All prime mortgages applications, regardless of bank, broker, credit union, etc., must be qualified at the stress-test rate, and not the interest rate you will actually pay.
The new qualifying rate (stress-test) on mortgages – is now either two percentage points above the contract rate OR 5.25%, whichever is higher.
Before June 1, the qualifying rate was two percentage points above the contract rate OR 4.79%, whichever is higher.
*Note, if a Borrower is renewing an existing mortgage at the same lender with no material changes (to loan amount or amortization), then you should not have to be re- qualified. Lenders normally do not re-qualify existing clients at renewal, but they do maintain the right to if they feel it is necessary.
Does this affect how much I qualify for?
This change from 4.79 to 5.25% represents an approximately 5% reduction in qualifying limits for all borrowers. For example, if a borrower was pre-qualified for a mortgage of $500,000, after June 1 this became $476,000.
If you intend to buy/refinance lower than your maximum qualification limit, then you won’t notice any change.
Will this change help to lower home prices?
This change alone is not enough to cool the market, but it is a small step. The largest factor to subdue the market will likely be increased interest rates, when that time comes.
For example, when the stress-test increases to 6.25%, only 1% higher than today and a very conservative view of where the qualifying rate could be in the coming years, this will reduce a borrower’s buying power by approximately 13%. So the same example above of qualifying for $500,000 then becomes $442,000.
