New Mortgage Stress Test – The Impact to Home Buyers

New Mortgage Stress Test – The Impact to Home Buyers

The new mortgage stress test which came into effect January 1st makes it more difficult for Canadians to qualify for a mortgage, and the combination of rising rates and the new stress tests could force home buyers to come up with significantly higher down payments than 2017.

Outside Greater Toronto and Metro Vancouver the stress test likely won’t have as big an impact to the average home buyer. Buyers in any city with expensive real estate need to pay attention because compared to 2016 they could qualify for 30% less mortgage. The combined impact of higher rates and the stress tests will slash their home buying budgets.

Rates are rising

A competitive 5-year mortgage rate was approximately 2.5% in 2016 and early 2017 but since then rates have risen over 0.5%. Most forecasts see rates rising another 1% between now and the end of 2019. As you’ll see from the chart below, that is still well within the range of rates in the past 10 years.

 5-year fixed mortgage rate is expected to rise to at least 4% by 2019.

5-year fixed mortgage rate is expected to rise to at least 4% by 2019.

The stress test

The federal regulator has required banks to apply a 2% stress test to all mortgage approval decisions.

This means the government wants lenders to test whether a home buyer can handle a 2% increase in mortgage rates.  The government believes there is a real risk of rates increasing by 2% so they are protecting Canadians from taking on too much debt while rates are low.

 By 2019, home buyers must show they can support a mortgage with a 5-year rate of 6%.

By 2019, home buyers must show they can support a mortgage with a 5-year rate of 6%.

How bad is it?

The figure below shows how a household with a gross income of $100,000 will qualify for $161,000 less financing in 2019 than they did in 2016.

The most impacted are home buyers who signed a pre-sale contract in 2017 believing they could afford the home based on their savings and a mortgage pre-approval for a specific dollar value. They may not be able to take possession if their mortgage falls short by tens of thousands of dollars!

Tragically, if Canadians limit their lender options they may have to cash in investments, ask for early inheritance, or sell their home before taking possession.

 This household would need to save an additional $160 thousand down payment to buy the same priced home.

This household would need to save an additional $160 thousand down payment to buy the same priced home.

What to do?

Provincially regulated lenders, including Credit Unions and private lenders, are not required to apply the stress test. The media refers to these lenders as “shadow lenders” but there’s nothing shadowy about them. They are regulated by respected provincial regulators like FICOM and FSCO and must adhere to high professional and risk standards.  

Many lenders also have the option to spread mortgage payments over a longer timeframe (e.g., 35 years) which can help a borrower pass the stress test with a higher mortgage amount.

To get access to experts who know what every lender is doing, consult a mortgage broker. They have the broadest number of options to find you suitable financing.

 

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