Stress Test Adjustment June 1st, 2021
***UPDATED May 21st, 2021***
The original post below was written before these changes were confirmed. With this amendment, it is confirmed that not only uninured but also INSURED mortgages will all be qualified at the new qualifying rate below of 5.25%. The opportunity to off-set these changes by moving to a 30-year amortization from a 25-year amortization will not be an option for insured borrowers who will now be the ones most affected. Please read below from the original post to understand the changes and reach out if you have any questions.
OSFI (Office to the Superintendent of Financial Institutions), the government body that is responsible for regulating Federal Banks across Canada, has announced they will be entering into a consultation period looking at potential adjustments to the current mortgage "Stress Test". Mortgage borrowers have been required by the Federal Government since the end of 2017 to qualify for their mortgages at either the Bank of Canada's Qualifying Rate or their contract rate plus 2%, which ever is higher. Even though 5-year fixed interest rates have been below 4% since the summer of 2010 and below 3% for the past 2-years, they have proposed increasing the qualifying rate from the current 4.79% to 5.25% for all uninsured mortgages.
What Impact Does The "Stress Test" Have?
At the time of this writing, if a borrower wanted to qualify for a $500,000 mortgage, the interest rate they could expect on a 5-year fixed term is 2.39%. This interest rate would be considered the contract rate and would require approximately $88,000 a year in household income to qualify for the $2,212.53 monthly mortgage payment. Under the current "Stress Test" rules, that $500,000 mortgage would be underwritten with an interest rate of 4.79%, the current Bank of Canada Qualifying Rate, as it is higher than 4.39% (the contract rate plus 2%). This $500,000 mortgage now requires $108,000 of household income to ensure a monthly mortgage payment of $2,848.54 can be made, even though they are only paying $2,212.53 based on the contract rate.
The "Stress Test" ensures that borrowers being approved for mortgages today, can still afford their monthly payments if their interest rates more than double. Keep in mind, the last time 5-year fixed rates were above 4.79% was at the beginning of 2009 when the housing market in the United States of America crashed.
Impact of Changes Being Proposed
From now until May 7th, OSFI will be collecting input from stakeholders on their proposed changes, mainly around increasing the "Stress Test" from 4.79% to 5.25% for all uninsured mortgages (now insured mortgages as well). OSFI will announce any amendments before May 24th, 2021 and those changes will be in effect June 1st, 2021. It is expected those changes will affect any mortgage closing after June 1st, 2021 regardless of when they entered into a contract, meaning potentially no grandfathering for pre-sales or existing mortgages.
That same $500,000 mortgage being qualified at 4.79% under the current "Stress Test" that required $108,000 of combined income, will now require approximately $113,000 of combined household income at 5.25%. For those whose income is not increasing, that means the $108,000 of combined household income now allows you to be approved for approximately a $480,000 mortgage at 5.25%- a decrease in mortgage affordability of approximately 4%.
Why is This Being Proposed?
Canada's housing market and prices have been hitting record highs throughout the pandemic and the feeling from the Federal Government is that the housing market needs to be cooled. One of the reasons for a change to the qualifying rate is it will push people who just barely qualify for a home, out of the housing market and as a result slow demand. The initial stress test in 2017 decreased people's affordability by approximately 25% which would mean being approved for a $650,000 mortgage with $108,000 household income one day, and then only a $480,000 mortgage the next day with the same amount of income on your application. Also, it's a measure being considered to reduce the economy's risk exposure to inflation and rising interest rate concerns that they feel would result in increased mortgage defaults (which have been at record lows, currently 0.16%).
There is an issue though, when you decrease affordability by 4-5% like they are proposing, you are not removing 12 people from a bidding war that results in a property going for $300,000 over ask, you are only removing a handful of people from that bidding war. The ability for those remaining to still drive the price up 6 figures higher than it's list price is still there because they have no where else to buy. This is undoubtedly why you are seeing remote, lower priced markets sky rocket in value because this pandemic has shown us that working from home is feasible and some people do not need to live in major urban residential areas where prices were already unattainable just to be close to offices.
If you have any questions about a mortgage you may have closing after June 1st, 2021 or anything in regards to these changes, please do not hesitate to reach out to me at email@example.com or 778-237-4876.