It’s official. Things are changing (again).
Take the Stress test to see how it may impact you purchasing power or refinancing options.
The Office of the Superintendent of Financial Institutions (OSFI) released revised guidelines for the mortgage industry, similar to the draft version released earlier this summer. These new parameters will take effect January 1, 2018.
These new guidelines include a stress test for uninsured mortgages (mortgages with more than a 20% down payment or 20% in existing equity).
This new stress test means that borrowers will be qualified based on the greater of their rate + 2% or the five year benchmark rate published by the Bank of Canada, which today is currently 4.89%.
For example if your rate was 3.29% then the rate you have to qualify at would either be 3.29% + 2.00% (5.29%) or the Bank of Canada benchmark rate. With the current benchmark rate at 4.89% you would have to qualify at 5.29% in this scenario as that is the higher of the two.
You will still only be paying 3.29% but the rate that is used to determine how much you can qualify for would be 5.29%.
Here are some numbers to illustrate the impact. Let’s just base it on a $100,000 in mortgage amount and then you can multiply the payment accordingly.
Based on an interest rate of 3.29% (rate you pay) with a 25 year amortization (total length of time to pay the mortgage off).
Mortgage Payment = $488.25 based 3.29%
Benchmark Rate Payment = $575.36 based on 4.89%
Stress Test Payment = $598.22 based on 5.29%
From the numbers above you can see that this stress test has a fairly substantial impact on the mortgage payment used for qualification. This will in turn reduce your maximum allowable mortgage by approximately 20%.
So if you are looking to purchase a home and have 20% down (or more) or you are looking to refinance your current mortgage you will want to pay close attention to these changes and you should run a pre-approval based on both scenarios to see what the impact will be for your specific scenario.
Lenders may also choose to start to implement these new qualifying criteria before January 1st so if you feel these changes are going to have a negative impact on your ability to qualify I’d suggest acting sooner than later.
-Mortgage Expert Jason Roy