Mortgage rule changes

Mortgage stress test changes kick in Tuesday.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed last week it will move ahead with the stress test changes it announced last month.

The changes will apply to uninsured mortgages — those with more than a 20% down payment.

The Department of Finance confirmed it will follow OSFI’s lead and apply the same higher qualifying rate to insured mortgages, or those with less than 20% down.

Starting June 1, both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.

When the mortgage stress test was first introduced in 2018, the qualifying rate at that time was 5.34%. It is currently 4.79% and will increase to a minimum of 5.25%.

The new stress test rate will reduce purchasing power by approximately 4-4.5%. Applying the higher stress test to insured borrowers will impact roughly one in five mortgage borrowers.

The Finance Minister made this statement regarding the increase in the stress test rate for insured mortgages.

“The recent and rapid rise in housing prices is squeezing middle class Canadians across the entire country and raises concerns about the stability of the overall market,” Finance Minister Chrystia Freeland said in a statement.

“The federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages…. It is vitally important that home ownership remain within reach for Canadians.”

This new mortgage rule change isn’t that drastic so it might not do much to cool the housing market since the bigger issue is supply and it’s doubtful that it will do anything to prevent rising home prices.

The other side of the change is to protect the lenders and the quality of the mortgages on their books and reduce the potential for mortgage defaults. The Bank of Canada feels that the quality of mortgages granted during this pandemic have declined.

I’m sure many mortgage brokers would comment that it’s actually been more difficult to get clients approved and mortgage requests have had more scrutiny recently.

Mortgage default rates are still low in Canada and debt levels are generally being managed well.

The new mortgage stress test may disqualify some insured mortgage buyers given that they are typically our young, first-time home buyers, singles or those who are going through a marriage breakup.

In some real estate markets, it’s almost close to impossible for those in these categories to afford home ownership already as typically they only have 5% down payment funds available.

This change will force them to either save more for a down payment or reach out for family assistance.

For insured mortgages, the maximum allowable for housing costs is 39% of gross income, but in comparison for uninsured mortgages some lenders will allow up to 44% of gross income and even up to 49% with some of the big five banks for very qualified borrowers.

It’s doubtful that the increase in the stress test will affect those in this category at all.

If you are curious how this change may affect your future mortgage borrowing, whether you are considering a new home purchase or refinancing to access equity in your property for renovations or consolidating debt, please give me a call to discuss and we can run some numbers.

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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