Starting on January 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) set a new minimum qualifying rate, or “stress test” for all prospective home buyers, even those with a down payment of over 20%.
Before the new rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Now it doesn’t matter how much money you save for a down payment, if you don’t pass the new stress test, the bank will not give you a mortgage.
Under the new mortgage stress test, potential home buyers need to qualify for a mortgage at a rate that is either 2% higher than the mortgage rate they qualified for, or the Bank of Canada’s five-year benchmark rate. For most, that will mean qualifying for a home that is worth 20% less than what they would have prior to the new stress test rule.
What Does This Mean for Home Buyers and Sellers?
The new mortgage will hurt the fastest growing segment of Canada’s mortgage market—uninsured mortgages. That’s one out of every six potential home buyers across the country. It will also impact those that have to renew their mortgages this year, making the process a lot more difficult to navigate.
This strict stress test, which is meant to ensure borrowers can afford to pay their mortgage at a higher rate, is now being applied to all home buyers, even those with a down payment of 20% or more. These tests are lowering a family’s purchasing power by up to 20%.
Economists say the stricter mortgage rules will also negatively impact softening housing markets across the country. It is expected the tougher mortgage rules, once fully implemented, could potentially depress housing demand by up to 10%. Sellers should realize the importance of pricing their home to stay in-line with current market conditions in Calgary. For those staying in their homes, expect to see a slow-down in the rate of appreciation.
Should You Be Worried?
If you’re a first-time home buyer, the stricter mortgage lending rules mean you might need to rent for a little longer or wait until your income increases before you can buy a home. Because the purchasing power does not go as far as it once did, first-time home buyers may need to consider something besides a single-family home in Calgary, perhaps a townhouse or a condo. Or, first-time home buyers may need to get a co-signer to qualify under the strict new rules.
If you are renewing a mortgage, lenders don't have to apply the stress test to the renewal, however, it may mean you have to accept an uncompetitive rate from your existing lender. There are always other options though, and we can help put you in touch with Mortgage Brokers who are experts at navigating the complexities of the new mortgage rules.