Desmond Brown

New Stress Test for Mortgages: WHAT DOES IT MEAN?

06 November 2017
Desmond Brown

Some of my colleagues and mortgage brokers have been freaking out since last month's announcement about the newstresstest requirement for all buyers.  In my opinion, this is a good thing.  This new change will definitely have an impact on what buyers can afford, but in the long run, they'll be better off and won't be mortgage poor. 

If there's a hike in mortgage rates and homeowners are already on the edge with monthly affordability, this could possibly lead to them losing their homes. The newstresstest, which makes buyers qualify at 2% higher than the posted or contract rate, will help to ensure buyers will be able to keep their homes.

Since the announcement, we've seen a flurry of activity from buyers who are racing to beat the implementation of the new rules which to into effect on January 1, 2018.

To help you understand exactly what the new measure mean, see the scenarios below. They were given to me by Dominion Lending Centre's Erin Kouvertaris, a mortgage agent in my office:

The Government of Canada has followed through on their proposed changes with how we qualify mortgages. The “Stress-Test” is here, and will come into full effect on January 1st, 2018.

The official release is here.

Here’s what this could mean for anyone looking to make changes to their mortgage or is in the market for a NEW mortgage: Effective January 1st, ALL uninsured mortgages (mortgages where buyers have 20% down or more)  regardless of down payment will have to qualify at +2% higher than the contract rate, OR at the Bank of Canada’s benchmark rate (currently 4.89%) – whichever is greater.

WHAT DOES THIS MEAN? In a nutshell, less purchasing power.

Example 1: a 1-year fixed mortgage today goes for about 2.94% from TD. Therefore adding 2% means I have to qualify this borrower at 4.94%.

Example 2: a 5-year fixed today with Scotiabank is about 3.34%. After implementing the Stress-Test and adding 2%, now I have to qualify the 5-year borrower at +2%, so 5.34%, much higher than what I had to qualify that same borrower at previously, which was 3.34%.

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Let’s use Susan as an example. Susan works for an insurance company, handling large claims. She makes $100,000 per year and has saved 20% down payment for her first ever condo purchase.

CURRENTLY Susan could borrow $640,000 using her income (a purchase price of $800,000).

AS OF JANUARY 1st 2018 Susan can borrow $505,000 (a purchase price of $631,250).

From the example above, it is quite clear how drastically this will impact anyone and everyone who is considering buying, refinancing or transferring their mortgage in the near future.

If you'd like to discuss these latest regulations, the real estate market in general, buying and selling or life, please get in touch!


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