An Overview of the New Mortgage Stress Test Rules
The January 2018 Rule Changes
Toward the end of October 2017, Canada’s banking regulator announced it was changing the underwriting guidelines again. The OFSI guideline B-20 will further tighten lending standards, mostly by changing the mortgage stress test standard lenders must apply to borrowers.
The “stress test”, or minimum qualifying rate, will be extended to home buyers putting down at least 20% of the property value. The stress test previously only applied to insured fixed rate mortgages with a down payment of less than a fifth of the home value, adjustable rate mortgages and short-term mortgages of five years or less. The stress test will test one’s ability to afford the mortgage at a higher benchmark rate or 2% above the interest rate in the contract. For all of 2017, the benchmark rate was 4.99%. For someone with a fixed rate mortgage at 3.5%, the mortgage rate in the stress test would be 5.5%, not the 4.99% benchmark rate. This is expected to reduce the average home buyer’s borrowing ability 2%-3%.
The stress test is estimated to reduce the borrowing capacity by about a fifth. The newly affected home buyers are a small portion of the total market. However, they will be impacted when the new requirement goes into effect on January 1, 2018.
This mortgage stress test may impact by the real estate market as a whole by limiting what most buyers can buy, putting pressure on high real estate prices.
The higher stress test threshold is in addition to new regulations that only apply to sub-price mortgages. These mortgages are issued by “B” lenders, also called non-conforming lenders. These lenders typically don’t provide high ratio mortgages while charging a higher interest rate than the traditional interest rate.
Lenders will have to alter their loan to value measurement for properties. The loan to value ratio they have to abide by may change as economic and housing market conditions change. These new regulations prohibit arranging a mortgage or combination of financial
products where the goal is to get around the current loan to value ratio. Mortgage brokers can technically still do this, if the borrower qualifies on their own for both mortgages with each of the lenders involved.
The stress test changes aren’t expected to affect real estate markets in cooler markets like Alberta, though it may put pressure on the
luxury home market. The stress test will probably impact the insane real estate prices in Vancouver and the over-heated Toronto market.
Paul Taylor, the CEO of Mortgage professionals Canada, was glad to see a concession the Office of the Superintendent of Financial Institutions made. He was glad that there was not a prohibition on all co-lending, which would have had a broader impact on the housing market, instead only restricting the arrangements that could circumvent loan to value ratio limits. He was disappointed at the decision to set the stress test at 200 basis points above the contract rate or benchmark rate, whatever was higher. He thinks this will negatively impact the Canadian mortgage finance market as well as the Canadian economy as a whole.