What is the Stress Test?
Back in early 2018, OSFI (the Canadian regulatory body that oversees mortgage lenders amongst other things) was concerned about borrowers being overexposed to mortgage debt during what they thought was a short-term period of lower than expected mortgage rates. To protect borrowers against rising interest rates, they created the stress test.
As we discuss in our Guide to Buying a Home, the amount of mortgage you can qualify for is based on a set calculation. The stress test affects just one part of that calculation, the mortgage payment. In response to the housing market rally, OSFI has now proposed a new stress test rate of 5.25% to further reduce what people can qualify for.
How Does This Impact Me?
Originally, OSFI had proposed applying this new stress test rate on uninsured mortgages (people buying over $1MM, refinances, rental property investors, etc). However, last week after input from the Canadian Department of Finance this was revised to now include all mortgages. This means all borrowers are impacted effective June 1st.
The only people who will not be impacted after June 1st are those that have a signed purchase agreement (if it’s a purchase) and a mortgage commitment letter that is dated before June 1st. Otherwise, you will be subject to the new stress test rate. Anyone that already has an ongoing mortgage application and a signed purchase agreement (if it’s a purchase) will still qualify under the existing stress test of 4.79%.
To illustrate the impact to your mortgage qualifying amount, here’s a sample scenario:
Annual Income: $80,000
Down Payment: $50,000
Purchase Price: $500,000
|Method||Mortgage Rate Used in Calculation||Max Qualifying Purchase Price|
|Actual Mortgage Rate||1.73%||$559,144|
|Current Stress Test Rate||4.79%||$432,658 (-22.5%)|
|New OSFI Stress Test Rate||5.25%||$417,287 (-25.4%)|
These rates are as of May 26th, 2021
As you can see, the impact from the new stress test rate is not material as it equates to roughly an additional loss of purchasing power of about 3%.
In addition, we would’ve eventually had this qualifying rate regardless. According to most leading economic forecasts, by early 2023 5-year bond yields were expected to have risen 0.30-0.65% (which are correlated with 5-year mortgage rate movements). So this new stress test rate is effectively just bringing forward that impact by about 1-1.5 years.
What Do I Do Now?
Considering that most people buy at less than 97% of their maximum pre-approved amount, the impact should be negligible. Just to be safe, if you currently have a pre-approval outstanding you should reconnect with your mortgage professional to assess your new pre-approval amount. At Perch, we took the liberty of recalculating all our clients’ current pre-approvals and updated everyone on where they stand.
If you feel like this makes home ownership even less attainable than you already thought, don’t despair! With tools like our home buying plan, we are still able to help borrowers maximize their buying power and invite you to create a plan to see how early you could become a homeowner.