Mortgage Stress Test – What’s New?
The OSFI Mortgage Stress Test has been mandatory for Canadian home buyers who want to apply for a mortgage from a federally-regulated lender, such as banks. It’s meant to test the buyer’s ability to continue making on-time payments under stressful situations, such as loss of income or drastic increase in interest rates.
The stress test was put in place in 2018 to prevent citizens from taking on more mortgage loan debt than they can afford and potentially defaulting on their payments in the future. It applies to uninsured mortgage loans, requiring applicants to meet their lender’s minimum qualifying rate–which can be significantly higher than the rate they were approved for in their mortgage contract.
Currently, the minimum qualifying rate is 4.79%, which is subject to increase after June 1 as the requirements for passing the Stress Test change. The proposed changes to the test will allow borrowers to qualify if they can:
Qualify for their mortgage at their current rate plus 2%
Qualify at a rate of 5.25%
Whichever is higher is the rate they will be tested on.
So, what do these changes mean for first-time home buyers? Buying your first home can be tricky, terrifying and expensive as is. The new, stringent conditions to the stress test may result in many buyers rethinking their decision–but for others, it can be a way to get a head start on the challenges they are likely to face in the future housing market. Let’s look at some of the pros and cons:
Pros:
Prevents borrowers from taking on too much debt
Prevents borrowers from becoming house poor
Helps borrowers avoid defaulting on mortgage payments
Makes borrowers aware of their affordability
Cons:
Reduces purchasing power of uninsured borrowers
Unrealistic floor rate makes it unnecessarily difficult to pass the test
Exasperates the wealth gap in lower income individuals and families
Fails to consider buyer’s income growth
The new Mortgage Stress Test is a widely debated proposal and has not come into effect–yet. Although the motivations behind the changes to the test are noble, the execution may very well restrict many Canadian buyers from purchasing their first home. Right now, it’s a waiting game to see what happens next, however you can make your opinion known by emailing your thoughts to B.20@osfi-bsif.gc.ca before May 7th, 2021.