If you weren't already aware, the process of approving an uninsured mortgage against a qualifying interest rate is called the stress test and is meant to ensure that you can still afford your mortgage even if interest rates were to rise down the line. Current rock-bottom interest rates, an increased demand for homes and a shortage in supply have heated housing prices and prompted calls on the federal government and regulators to tighten rules to cool this unbelievably hot market. As such, Canada’s banking regulator has recently proposed changes that would strengthen the current stress test applied to uninsured mortgages. The proposed changes would require buyers applying for uninsured mortgages (usually those with a 20% or higher down payment) to qualify at their mortgage contract rate plus two percentage points or 5.25%, whichever is higher. The current stress test in place has a minimum qualifying rate of 4.79%, nearly 50 basis points lower.
Additionally, the Office of the Superintendent of Financial Institutions (OSFI) said it plans to “revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment.” The OSFI Superintendent says that the higher floor rate is based on an average of the qualifying rate in the preceding 12 months leading up to the pandemic, adding that financial markets must be prepared for a return to pre-pandemic conditions (meaning higher interest rates.)
Public reaction to OSFI’s announcement was instant, with some saying the increased minimum stress test went too far, while others said it didn’t go far enough. It’s estimated that this proposal would reduce purchasing power for uninsured borrowers between 4%-4.5%. This would be bad news for buyers, especially those with financials that are already tight. “The maximum amount that can be borrowed under the new rule would decrease by 4.5% (from $442K to $422K for a median-income household),” National Bank economists wrote. Many are doubtful that this alone will significantly cool the housing market. There’s no word yet if changes to the insured mortgage stress test will be coming as well.
The public is invited to provide feedback to OSFI via B.20@osfi-bsif.gc.ca up until May 7, 2021. After that time OSFI will communicate some of that feedback and any final amendments to the qualifying rate by May 24, 2021, prior to the new stress test taking effect on June 1, 2021. If you have been thinking of making a purchase in the near future, I'd recommend giving your mortgage broker a call ASAP. These changes are still being proposed, which means there is still a window of higher affordability before the new stress test would take effect on June 1st. If you buy a home before June 1st, your uninsured mortgage will still be subject to the current, slightly more lenient stress test. Closer to June 1st, you’ll still have a chance at qualifying under the current rules. Anyone who signs an offer to purchase prior to June 1st, but whose home closes after June 1st, should ensure that they have mortgage approval. When mortgage regulation has changed in the past, the government will typically grandfather existing approvals under the old rules even if the mortgage has not yet closed.
Please feel free to reach out if you'd like me to connect you with a mortgage broker to discuss further or if you have any questions at all regarding real estate.
Yours Truly,
The Condo Confidential