As of Monday January 1st 2018, all borrowers will need to pass a stress test before they are allowed to take out mortgages from federally regulated institutions such as banks, regardless of how large their downpayment. People who fail the test won’t be able to buy, and estimates have put the ratio of those who will flunk as high as one-in-five.
What is a stress test?
It’s all about subjecting prospective home purchases to a “What if?” scenario. Specifically, what would be the shape of a given buyer’s finances if interest rates were to suddenly spike.
The concept is relatively new. Insured mortgages in Canada were already subjected to such tests, but they now apply to uninsured mortgages as well, explained Samantha Gale, the CEO of the Mortgage Brokers Association of B.C.
How high is the bar?
Potential buyers will be tested against the greater of either the Bank of Canada’s five-year benchmark rate (now 4.99 per cent) or the rate offered by a lender plus another two per cent.
“For example, if they were to get a mortgage with an interest rate of three per cent, they now need to qualify to show that they can afford five per cent,” Gale explained.
What if the bar is too high?
Those who fail the test will need to look for something cheaper on the market.
“If you were to buy a home worth $700,000 last year, this year you might only be able to afford a home worth $560,000. That’s quite a big discrepancy,” Gale said, adding that it is probably more important than ever to speak to a mortgage broker to see what the options are.
Why put buyers to a test?
The federal government is concerned about Canadians’ debt levels, Gale said. Because it has the tools to regulate banks, it is easy for Ottawa to impose mortgage rules rather than rules on other forms of borrowing, she said.
Gale said she did not believe a housing crash like that experienced in the U.S. a decade ago is in the cards. “Generally speaking, people want to stay in their home. They find a way to pay their bills, to pay their mortgage,” she said.
Do the new rules affect you?
Quite possibly. If you are buying and need to borrow from a bank, they will, and they will also apply to anyone looking to refinance.
While those seeking to renew mortgages under existing terms will not need to re-qualify and be stress tested, those shopping around for a better rate will. “One of the challenges might be that a certain lender might not offer a competitive rate at renewal time, knowing that buyers can’t really shop around,” Gale said.