Banking regular OSFI (short for Office of the Superintendent of Financial Institutions) has become quite the topic around watercoolers these days. If you’ve been following the news lately, I’m sure you’ve heard plenty about the new mortgage stress test OSFI is introducing. It’s perhaps the most anticipated mortgage rule change ever. Currently only homebuyers putting down less than 20 percent have to pass a mortgage stress test, but that all changes come January 1, 2018. After that everyone – even buyers putting down more than 20 percent – are required to pass a stress test.
How the New Mortgage Stress Test Works
In the new year, homebuyers with uninsured mortgage (those putting down more than 20 percent) will need to pass a mortgage stress test. The stress test will prove that you can handle higher mortgage rates if and when they arrive.
In order to be approved for a mortgage, you’ll need to be able to prove you can handle a mortgage rate the greater of the Bank of Canada’s five-year benchmark rate (currently sitting at 4.89 percent) or your contract mortgage rate plus two percentage points. For example, if your contract mortgage rate is 3.09 percent, since 5.09 percent (two percentage points higher than 3.09 percent) is greater than 4.89 percent, you’d need to be able prove you can handle mortgage payments at those amounts.
OSFI is introducing these changes to its guidelines, known as B-20, to “reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada.”
How Do the New Mortgage Rules Affect My Purchasing Power?
That’s the million dollar question. To see how the new mortgage rules affect your purchasing power, let’s crunch some numbers. Let’s say you’re a family earning $100,000 a year, making a 20 percent down payment. You choose a five-year fixed rate mortgage at 3.09 percent, amortized over 25 years. Under the existing mortgage rules, you’d be able to spend up to $706,692 on a property, but under the new mortgage rules, you’d only be able to spend $559,896. That’s a big drop!
Although the new stress test officially comes into effect January 1, 2018, there’s speculation some federally regulated lenders may adopt it early. Also, something to note. The new stress test is only for federally regulated lenders. It’s currently unknown if credit unions will follow suit and introduce a similar stress test of their own.
Even if you’re not buying a home, the new mortgage stress test could impact you. If you’re looking to refinance your mortgage, you may need to re-qualify under the new mortgage stress test. Likewise, if your mortgage is coming up for renewal and you’re thinking about switching lenders, you may need to pass the new stress test under this scenario as well.
The Bottom Line
If you’re thinking about buying a home and you’re financially ready, now may be the time. Home buyers will lose about 20 percent of their purchasing power under the new mortgage rules. But don’t be “stressed” (pun intended). We can run a stress test for you and see if it would affect your purchasing power. Contact our offices today for a helping hand with the latest mortgage rule change.