How to Understand the New Mortgage Stress Test?

New mortgage regulations are coming into effect on January 1st, 2018, and here is a quick summary of everything you need to know about the changes. The Office of the Superintendent of Financial Institutions (OSFI) has passed new regulations popularly called “The Mortgage Stress Test”.

The bottom line is that new and some existing mortgage applicants will have to qualify for their loan at a much higher rate to get approved.

Under the new stress test for mortgages, an applicant’s eligibility for a mortgage will be calculated based on interest rates of either 4.99% or the rate offered to them by the lender plus 2%, whichever is greater.

For example, if an applicant is applying for a mortgage from their lender at a rate of 2.80%, the applicant will have to qualify for the same amount at an interest of 4.99%. This is in spite of the fact that the applicant will only be paying 2.80% on their loan.

Or, if in that same scenario the lender is offering an interest rate of 3.5% to the applicant, that applicant will have to qualify for the mortgage at 5.5% (3.5%+2.0%) to pass the stress test.

This will result in hundreds of thousands of dollars in lost purchasing power.

How will the stress test impact your buying power?

In Example 1, you can see the impact that the stress test will have on your purchasing power. The payments for your mortgage stay the same ($2,492.70/month), but you will have to be approved to make much higher payments ($3,174.37/month). Before the stress test, you could purchase a property in the range of $740,000, but after the stress test, you will only be approved for a mortgage in the range of $540,000-$580,000.

In Example 2, if you are currently approved for a $510,000 mortgage, your purchasing power would go down to the $430,000 range under the new regulations.

What these examples show is that without a significant increase in your income, you might be forced out of the market.

What will happen to your existing mortgage when you refinance?

If you are refinancing or renewing your mortgage with the same financial institution you will not have to pass the stress test. However, if you decide to change your financial institution, you will have to pass the new stress test.

Something that both buyers and sellers should keep in mind is that the Bank of Canada says that it will continue to raise interest rates in the near future which will be directly reflected in a tougher stress test.

These new regulation will definitely put a strain on buyers currently looking to make a new purchase. Some of these buyers will get pushed out of the market if they can’t find a property before January 1st, 2018. This new regulation might cause a cool down of the housing market, as well as a short term frenzy to buy before the January 1st 2018.

On the positive side if you have your 20% deposit you have a window of opportunity to buy.