Stress test correction relaxed rules by osfi & government of canada

Mortgage Stress Test Correction – Changes Coming in April 2020

In First Home, New Mortgage Rules, OSFI by Vancouver Mortgage Broker

The Office of the Superintendent of Financial Institutions (OSFI) has announced it will be revising it’s policies for Canadians applying for an insured mortgage (ie less than 20% down payment).

 

Here are the key points from the announcement:

  • Takes effect April 6 2020
  • Applies to Insured Mortgages only.  In most cases Insured Mortgages apply to purchases with less than 20% down payment, however there are some mortgages that are eligible as “Insurable” where a buyer has 20% or more down payment/equity in their property.
  • The new minimum qualifying rate will be (whichever is greater) of either:
    • The borrower’s contract rate + 2%; or
    • The weekly median 5 year fixed insured mortgage rate + 2%.  The Bank of Canada will publish the new benchmark rate every Wednesday, with the rate coming into effect the following Monday.

 

In the big picture this isn’t a big difference.  Based on todays rates this provides a 2 to 3% increase in buying power. 

Based on $100,000 of household income (assuming $1500 property tax, $300 strata fee, $50 heat)

@ 5.19%  – $450,000 mortgage

@ 4.89% – $463,000 mortgage, $13,000 more buying power 2.77% increase

@ 4.59% – $477,000 mortgage,  $27,000 more buying power 6% increase

So if rates continue down this would have more of an impact … however there isn’t a big difference today.

 

This change really is more of a correction than anything.
Historically, mortgage approvals change as mortgage rates change.  In the past if interest rates dropped, Canadians would be able to afford more of a home … and if interest rates rose, Canadians would afford less of a home.  Since the stress test came into effect January 2018 this historical pattern was no longer taking place naturally, as mortgage applicants must qualify on a set interest rate over 5% (even if the actual mortgage rate was below 3%).  This new change will allow the natural rise and fall of interest rates take their natural effect on real estate prices.

 

Stay tuned for the announcement on non-insured mortgages.  
The government is currently reviewing policies for mortgages that are not insured.  One would expect the stress test will be corrected similar to the correction on insured mortgages.  However, as this is still under review, perhaps we will see a greater relaxation on mortgages where borrowers have more equity/down payment on a home.

 

What should consumers that are in need of a mortgage do?
Those that are in the market for a new mortgage, either to buy a property or adjust the existing mortgage on their property, should continue to explore obtaining that mortgage now.
For home buyers … the small increase in mortgage amount (and therefore home affordability) isn’t large.  And that increase could be wiped out by a small increase in home prices, which is likely to happen with these new changes.
For home owners refinancing or adding to their existing mortgage … it is wise to seek your mortgage options now with interest rates currently dropping.

 

Overall, it’s welcoming to see the government of Canada & OSFI review the stress test and these new changes are a step in the right direction.