Yesterday (April 8th 2021) the Office of the Superintendent of Financial Institutions (OSFI) opened consultations on a proposal to uncouple the uninsured mortgage stress test from the Bank of Canada’s posted 5 year rate, and instead set it at the greater of the mortgage contractual rate plus 200 basis points or 5.25%. The proposed change would effectively increase the qualifying floor from today’s 4.79% by 46 basis points.
What is the stress test?
At present in Canada when qualifying for an uninsured mortgage (typically a mortgage with a down payment greater of 20% or the purchase price), you are not qualified at the rate you get on your mortgage, what we call the contract rate. You are qualified at what we call the benchmark rate, presently 4.79%, or the contract rate, plus 200 basis points (2%). Eg. If the contract rate on your mortgage was 3.09%, we’d be qualifying you at 5.09% (the rate plus 2%), and not the benchmark of 4.79%.
For a 5 year fixed at present market rates on the day of writing, you’d expect a rate around the 2% mark. So if your contract rate was 2.04%, we’d be qualifying the mortgage at 4.79%, because this is greater than the rate plus 2% (4.04%)
This stress test for uninsured mortgages was introduced in 2018 with the intent of evaluating whether a borrower would be able to still make their mortgage payments should rates rise to this level. Some people state the stress test as a “pass or fail” as to whether you can get a mortgage, but in reality what it does is determine how much you can afford in relation to your income with this added restriction.
The mortgage stress test potential impact
What Does This Mean?
With a new minimum qualification floor of 5.25%, this will therefore decrease a buyer’s top end purchase price, should they want to qualify traditionally with a lender who provides best rate on mortgages, such as a bank or mortgage financing company. This increase from 4.79% to 5.25% will result in around a 5% decrease in maximum mortgage affordability for most buyers.
Credit Unions in Ontario are not obliged to stress test mortgages, and therefore do still qualify clients at the contract rate. However, for this privilege you will not be getting the best market rates, typically with rates being around 1% higher for a 5 year fixed.
Will this affect you?
If these new rules do come into effect on June 1st, then when you apply for an uninsured mortgage, yes you will be qualified at the higher rate of a least 5.25% if rates remain at their present lows. If you have an approval in place with a lender prior to June 1st, don’t worry; rules are typically grandfathered in on prior approvals. Be sure this is a firm approval however.
If you have been pre-qualified or pre-approved for a certain amount with a broker or lender, but have not purchased prior to June 1st, you will then be subject to the new rules, and your top end purchase price will likely decrease.
At present there hasn’t been any news whether there will be an update to insured mortgages (a mortgage with a down payment less then 20% of the purchase price), so for now these will still be qualified at 4.79%.
It’s pretty safe to assume that this will be the first step of more to come in the governments aim to cool the housing market.
Tim Ward, Collingwood Mortgage Broker.
