In June 1, 2021, the Office of the Superintendent of Financial Institutions (OFSI) proposed changes to strengthen mortgage stress tests for uninsured mortgages. OFSI proposed these changes to slow down the rising cost of homes and prevent the market from overheating.
So, what exactly does this mean for homeowners and potential homebuyers in 2023? Here’s what you need to know:
1. What is a mortgage stress test?
It’s a way of testing your highest financial threshold as a homeowner if you’re affected by a sudden bout of financial turmoil. In other words—if the worst happens (i.e. sudden loss of income or sharp increases in interest rates), you’d still be able to afford your mortgage payments. This can also help you prevent foreclosures in the future by gaining a better understanding of your financial limits. It’s a safety net for both the financial institution approving your mortgage and yourself as a homeowner.
2. How is it changing?
Effective June 1, the federal mortgage stress test increases to 5.25%, from 4.79% almost a 50 bps jump. Applicants must qualify at their mortgage contract rate plus 2% or 5.25%, whichever is higher.
Let’s break down the math with an example:
2.19 on a 5-Year Closed Fixed Rate + 2% = 4.19%
This 4.19% is less than the 5.25% benchmark rate and so, when applying for your mortgage, the lender would use 5.25% for qualifying purposes. Even if you lock in at 4.19%, you and the lender know that you can still afford your home if the rate climbed to 5.25%.
3. How will this affect me?
If you’re doing an Equity Take Out (borrowing against your current residence), buying a rental property, transferring in a mortgage from a different financial institution, etc. it will reduce the maximum amount that can be mortgaged. The new stress test also applies for renewals which means if your mortgage expires in a couple of years you’ll need to ensure that you can pass the new standard.
It’s estimated that this proposal would reduce purchasing power for uninsured borrowers by between 4% and 5%, which means a smaller mortgage amount. For example, if you were approved for a $1 million mortgage before June 1, you would be approved for only $945,000 after June 1. This makes it a little more expensive for first-time homebuyers, however, it can help safeguard you from unforeseen financial circumstances.
4. What does a mortgage stress test do?
In the simplest terms, the stress test is to prevent future forecloses and tackle the household debt issue in Canada, avoiding the economic issues that come with consumers being approved for mortgages they may not be able to afford. In the upcoming years, if interest rates begin to rise, the stress test helps to ensure that consumers can afford their homes even if rates climb above 5%.
Have questions about the new stress test?
Get in touch with our Mortgage Team by booking an appointment online at a nearby branch or call us at 1.888.517.7000.