Another day. Another new mortgage rule. Last week, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) proposed a new change to the Stress Test for uninsured mortgage products. This new change makes it slightly more difficult for those who are planning to put 20% or more down for their mortgage downpayment or want to refinance.
When you go to buy a house or do a refinance, I run your application through what’s called the Stress Test. This means I use a higher, qualifying rate as opposed to the actual interest rate you’ll pay on your mortgage.
This qualifying rate tests your ability to pay for a higher mortgage payment if rates were to go up in the future. Today, I use the qualifying rate of 4.79% for both insured and uninsured mortgages even though you’ll actually be paying around half that rate when the mortgage is finalized.
The new mortgage rule will impact uninsured mortgages. These borrowers are not subject to pay the Mortgage Default Insurance premium as they are putting 20% or more down, or in the case of a refinance, have at least 20% equity in their home.
The new qualifying rate for these borrowers will be +2% of the contract rate or 5.25% (whichever is greater). I will end up almost always using 5.25% which is almost always the greater of the two.
Current Mortgage Stress Test for Uninsured Mortgages
Family Income: $100,000 per year
Amortization: 25 Years
Qualifying Rate: 4.79%
Property Tax: $3,600 per year
At the current rate for the Stress Test, this family would be approved for roughly a $440,000 mortgage amount, which with a 20% mortgage downpayment is a $550,000 purchase price.
Proposed Mortgage Stress Test for Uninsured Mortgages
New Qualifying Rate: 5.25%
* All other variables remain the same
At the new qualifying rate, this family would be approved for roughly a $425,000 mortgage amount, which with 20% down is a $531,000 purchase price.
So in this example, our family qualifies for about $15,000 less or about 3.6%.
Why Make a Change to the Stress Test?
You’ve likely heard that interest rates are really good right now, and that statement isn’t wrong. In the wake of this last year, the government and lenders have made it really easy to borrow money for both insured and uninsured mortgage products.
However, this has caused what the regulators are calling a “spurred frenzy” of people buying big homes. Their primary concern is that buyers are spreading themselves thin by buying too much house because interest rates are so low. This increases the risk that borrowers won’t be able to pay their mortgage in the future if and when rates go up.
These proposed tightening restrictions will reduce the borrowing power by less than 4% for a typical family if (and that’s a big if) buyers are putting down 20% or more.
What About Insured Mortgages?
I’m glad you asked!
Insured mortgages, or high-ratio mortgages, are mortgage products for buyers putting less than 20% down.
Here’s the thing: how much you put down for your mortgage downpayment is really up to you and your financial situation. Maybe you can put down 20% but elect to put down only 19%. You’ll have to pay the Default Insurance Premium, but you’ll still be able to qualify at 4.79% and get a little more house if you so choose.
Right now there’s no definitive direction on increasing the stress test for insured mortgages. But, there’s a lot of industry chatter saying that another change might be coming. If not to the stress test rate, then to debt servicing ratios which measure your capacity to take on more debt.
What Do You Do With This Mortgage Rate Information?
The change proposed goes into effect on June 1 if OFSI decides to implement it after industry feedback. So there’s still some time to make a purchase or refinance decision.
The number one thing you should do with this mortgage rate information is to reach out to me! Let’s see where your financial situation is at and if you can qualify today for a mortgage. The sooner you reach out, the better!