Adapting to the Mortgage Stress Test
Written by Penelope Graham
Tuesday, July 3rd, 2018
The mortgage stress test implemented by Canada's banking regulator is now currently in place. How has the housing market – and those vying to find a place within it – adapted to this stringent new qualification hurdle?
What is the Stress Test?
The stress test was announced in October 2017 and introduced on January 1, 2018 by the Office of the Superintendent of Financial Institutions (OSFI).
It requires borrowers to qualify for home financing at a higher rate than their actual mortgage interest rate. Just how much more depends on your down payment size: borrowers paying a down payment of 20 per cent of the home's value or less must qualify at the higher of their contract rate and Bank of Canada's benchmark rate, which is 5.34 per cent as of June 27, 2018.
Borrowers with a down payment of more than 20 per cent must qualify at the higher of the benchmark rate and their contract rate plus another 2 per cent.
By requiring borrowers to qualify at higher rates, OSFI's intention is to prepare borrowers in the case mortgage rates substantially rise. Otherwise, a rising interest rate environment could cause some homeowners to become unable to make their monthly payments, or to become "underwater" – owing more on their mortgage than the home is worth.
According to survey data collected by Zoocasa, more than half – 52 per cent – of Canadians support having the new stress test, and 47 per cent believe the measure helps protect the Canadian economy. However, 48 per cent felt that for first-time homebuyers—the group most reliant on low borrowing costs to break into the market—the stress test is harmful.
The stress test has also effectively influenced the home purchasing or planning decisions of Canadians. Of those who bought a home between October 2017 and March 2018, 27 per cent reported rushing their home purchase to beat the timing of the rules. Another 5 per cent delayed their home purchase, while 48 per cent said it didn't impact them (a full 19 per cent were not aware of the new stress test at all).
Of those who intend to purchase a home in the future, 40 per cent said the stress test wouldn't impact their plans. The stress test has dissuaded some would-be homeowners: 5 per cent reported they no longer wished to buy a home, while 15 per cent now feel homeownership is out of reach altogether.
How to Prepare for the Mortgage Stress Test
Adjust Your Expectations: It may be a bitter pill to swallow, but the reality of the stress test is buyers can't afford as much as they previously could. Lenders will be offering smaller mortgage financing amounts to applicants as a result of the higher qualification rates, and that will trickle down into the type of inventory buyers can afford. This could mean buying a condo or townhouse rather than a detached home, or looking to more affordable regions.
Don't Overbid: It can be easy to be caught up in multiple-offer situations, especially in Canada's highly competitive markets. If a home's value is overblown compared to the lender's appraisal, the homeowner may be offered less mortgage than they need to complete the purchase.