As of June 1st, Canadians seeking an uninsured mortgage – aka mortgages with a down payment of at least 20% – will need to pass a stricter stress test and prove they can afford payments at a higher qualifying rate.
The Office of the Superintendent of Financial Institutions (OSFI) says the minimum qualifying rate for uninsured mortgages will be the contracted rate plus 2 percent or 5.25 percent – whichever is higher. That’s up from the current qualifying rate of 4.79 percent.
OSFI says this change will reinforce the principles of sound mortgage underwriting, as the stress test aims to ensure homeowners could cope with higher payments if interest rates were to increase from their current lows.
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This higher qualifying rate will have a significant impact on Canadian homebuyers. James Laird, co-founder of Ratehub.ca and President of CanWise Financial, says “In the near term, this change will make it more difficult for homebuyers to qualify for a mortgage. At all income levels, this change reduces the amount of mortgage a household can qualify for by about 5 percent.”
According to Ratehub.ca’s calculations, a household with an annual income of $100,000 and a 20 percent down payment – with a 5-year fixed mortgage rate of 1.78 percent amortized over 30 years – would qualify for a home valued at $651,000 under today’s 4.79 percent qualifying rate.
Under the new stress test rate of 5.25 percent, the same household’s maximum affordability would decrease to $618,000. That’s a difference of $33,000 (or 5 percent).
There is a caveat: if you get a mortgage pre-approved before June 1st, OSFI says the lenders would have the discretion to underwrite the loans based on the prior qualification rate.
“Canadians currently shopping for a home should ensure that they have a pre-approval, as OSFI is allowing lenders to grandfather the current stress test rate for those that have a pre-approval prior to June 1st,” said Laird. “The grandfathering rules will be at each lender’s discretion. Anyone who has purchased a home already should ensure that they receive their mortgage approval prior to June 1st, as this should allow the home buyer to qualify using the existing stress test.”
If you’re in the market to buy a home you can calculate your own personal affordability by using Ratehub.ca’s mortgage affordability calculator.
New rules will likely apply to insured mortgages
After the OSFI announcement, the Federal Government announced insured mortgages (where borrowers have less than a 20% down payment) will likely be subject to the tighter stress test too. Finance Minister Chrystia Freeland’s department sets some of the limits around insured mortgages.
In an official statement, Freeland said:
“With today’s official confirmation from OSFI of the new minimum qualifying rate for uninsured mortgages, the federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages, subject to review and periodic adjustment, which will be the greater of the borrower’s mortgage contract rate plus 2 percent, or 5.25 percent. This will apply to insured mortgages approved on June 1, 2021, or later.”
OSFI has said it will review this minimum qualifying rate annually. They plan to look at the rate every December to make any adjustments necessary ahead of the busy spring housing market.
“In a complicated and sometimes volatile housing market, the need for sound mortgage underwriting cannot be underestimated. The rate in place as of June 1, 2021 will help support financial resilience should economic circumstances change, while our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system,” says Ben Gully the assistant superintendent of OSFI’s regulation sector.
What is a mortgage stress test?
When you apply for a mortgage, you’ll be offered a contracted interest rate – which is the actual rate that’ll be used to calculate your monthly mortgage payments and effectively represents the cost of borrowing money for your home purchase. However, the stress test requires you to qualify for a mortgage at a higher theoretical rate (than you’ll actually pay) to make sure you could still afford your monthly payments if interest rates were to increase within your term. So, while a stress test can decrease your maximum homebuying budget it won’t actually affect your monthly mortgage payments in real dollar terms.
The mortgage stress test first came into effect in 2018. At that time OSFI implemented a mortgage stress-test for all new borrowers in an effort to ensure Canadian homeowners spend within their means.
Since then the test has been criticized for being too strict and barring Canadians from bidding on a home they could afford at the contract rate being offered by the bank. But with housing prices, in some cases, seeing double-digit gains year-over-year, OSFI says these measures are necessary to make sure Canadians borrow responsibly and that they can afford that mortgage long term.
Decision made after consultations
In making its decision to raise the minimum qualifying rate OSFI received over 170 submissions from stakeholders and financial institutions. It’s clear OSFI sees a wide range of issues facing homebuyers, including high indebtedness, rapidly rising home prices, housing supply, and competitive bidding. This new, stricter mortgage stress test serves as a way to tamp down financial risk from the hot housing market.