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Mortgage Stress Test Rule Change Confirmed by Canada's Top Banking Regulator
Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) has announced that they will be proceeding in implementing proposed change(s) to the mortgage qualifying rules come June 1, 2021.
The minimum qualifying rate for both Insured and Conventional files will become: the mortgage contract rate (the rate offered on your mortgage loan) plus 2% or 5.25% - whichever is greater.
Insured mortgages are those with a down payment under 20%/backed by a mortgage insurer - CMHC/Sagen/Canada Guaranty. Uninsured mortgages are residential mortgages with a down payment of 20% or more.
Raising the qualifying rate for potential buyers will result in qualifying for a lower mortgage amount. In the examples below, there is approximately a 4% drop in mortgage qualification.
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's anticipated this latest announcement could again spur this type of activity.
The stress-test was implemented as a means of ensuring borrowers do not overleverage themselves. It is the metric used to qualify would-be home buyers for a mortgage loan; whereby 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.
Current Stress Test (before June 1st, 2021)
4.79% OR +2.00% over the given client rate
New Stress Test (After June 1st, 2021)
5.25% OR +2.00% over the given client rate
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 are committed to providing you with sound advice and continue to have access to numerous lending options, including ones who do not “stress test”.
Example #1: CONVENTIONAL FILE
- - Household income of $250,000/year
- - Auto loan of $500/month
- - Student loan of $100/month
- - Detached home in Mississauga
- - Purchase price = $1,875,000
- - $7,500/year in property taxes
- - Max mortgage is $1,500,000
- - Down payment needed = 20% ($375,000)
- - Monthly payment = $ 5,173.45
- - Stress test payment = $ 7,818.28
- - Max mortgage is $1,420,000
- - Down payment needed = 24.26% ($455,000)
- - Monthly payment = $ 4,897.53
- - Stress test payment = $ 7,791.66
***Decrease of $80,000 in lending capacity, or, 5.33%
Example # 2: INSURED FILE
- - Household income of $140,000/year
- - Auto loan of $500/month
- - Credit card balance of $8,000
- - 1+1 Bedroom condo in Toronto
- - Purchase price = $700,000
- - $3,000/year in property taxes
- - $505/month condo fee
- - Max mortgage is $655,000 + Insurance Premium of $26,200
- - Down payment needed is the minimum = 6.43% ($45,000)
- - Monthly payment = $ 2,914.22
- - Stress test payment = $ 3,880.85
- - Max mortgage is $630,000 + Insurance Premium of $19,350
- - Down payment needed = 10.00% ($70,000)
- - Monthly payment = $ 2,778.73
- - Stress test payment = $ 3,870.67
***Client must come up with an additional 3.57% in down payment ($25,000)