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The Effect of the New Mortgage Stress Test

Posted by Goran Todorovic, Broker on Friday, November 24th, 2017 at 2:25pm.

house in hand

 

On January 1st 2018, there is a new regulation coming into effect that may have an impact on your purchasing power. It is a revision to Guideline B-20 - Residential Mortgage Underwriting Practices & Procedures. These new guidelines further strengthen the federal regulation of mortgage underwriting.

What does this mean?

Everyone will be a subject to a "stress test" if they wish to have an uninsured residential mortgage.

Who typically has an uninsured mortgage?

Generally, if you have 20% downpayment or more, your mortgage will be uninsured. This means that you are not required to have mortgage default insurance. The most common provider of mortgage default insurance is CMHC. Previously, these types of "conventional uninsured" mortgages were subject to less rigorous qualification standards because they are deemed more secure due to the higher downpayment and equity in the home.

What is the goal of this new rule?

These new regulations are to ensure that borrowers can afford their mortgage payments even if interest rates are two percentage points higher than the contractual mortgage rate they are paying now. The federal government is enacting these changes to soften the real estate markets in primarily Toronto and Vancouver. Unfortunately, every market is subject to these rules despite which markets are deemed inflated.

What is the impact on buyers?

  • This could reduce the amount of an uninsured mortgage loan that a buyer could qualify to receive.
  • Mortgage rates are varied, offering different types (ie variable and fixed), timelines (1-5 years), interest rates, and amortization periods.
  • The likely result will be a shift in the type of mortgage chosen by home buyers, in order to qualify for their desired amount. For example, a homebuyer may choose a longer amortization period in order to qualify.

 

What is the impact on sellers?

  • In general, there is still a greater demand than supply for real estate in Canada.
  • Sellers should realize the importance of pricing their home to stay in-line with market forces.
  • The effect on overall prices for the average home may not be anything more than a slow down in the rate of appreciation. 

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