According to a recent article in Canadian Mortgage Trends, by Mortgage Professionals Canada, only half of Canadians are aware of the stress test requirements.
While this isn’t necessarily alarming, given that most people aren’t imminently buying a house and don’t need to be familiar with the rules, this limited awareness is also present among people who expect to buy a home during the coming year; there is a risk that some buyers could have unexpected difficulty in obtaining the financing they need.
Respondents to a recent survey agreed (6.84 out of 10) that the stress tests will “ensure that homebuyers will still be able to afford their homes if interest rates rise by a large amount in the future.”
However, those surveyed also agree (6.62 out of 10) that the stress tests “will result in more people having to turn to more expensive mortgage options from lenders.”
The concept of a mortgage stress test was introduced in fall 2016, aimed at buyers putting down less than 20 percent to ensure they could qualify at the lender’s 5-year posted rate. Uninsured mortgages (typically those with more than 20 per cent down payment) were not included at that time, based on the assumption that those putting more money down should be more able to manage the debt load.
This latter does not take into account all the down payments that have been gifted to first-time homebuyers by family. A first time buyer could purchase a $400,000 home with an $80,000 down payment as a gifted amount and still be able to qualify for a $320,000 mortgage that in the cold light of day would probably be unaffordable.
Do the new rules apply to existing homeowners? The short answer is no, you won’t have to re-qualify at the higher rates when you renew your mortgage if you stay with your existing lender and if you have no missed payments (e.g. NSF cheques, or property tax delinquencies).
Many home buyers with above-average debt, relative to income, will more than likely have to resort to much higher-cost lenders who allow more flexible debt ratio limits. At the very least, more will choose longer amortizations (i.e., 30 years instead of 25 years) and take longer to pay down their mortgage. Non-prime lenders will also become pickier. Why? Because they will see a flood of formerly “bankable” borrowers being declined by the Big Six. That could force hundreds of thousands of borrowers to borrow from lenders with the highest rates. So having a higher debt load, weak credit and/or less provable income will prove difficult. The shift to expensive non-prime lenders will increase mortgage carrying-costs and put many higher-risk borrowers into a debt and default risk.
Some possible outcomes:

  • A bonanza for non-prime lenders. Non-prime lenders and credit unions, mostly not under OSFI, will fund mortgages based on an actual (contract) rate, instead of the much higher stress-test rate.
  • Banks are thrilled about customer retention. If your bank knows you cannot leave, you know they will use that as advantage to raise rates to subpar levels.
  • Panic buying in the near term from people afraid of not qualifying after January 1. This could slow down the housing market.
  • The stress test could push prospective homebuyers away from banks to lenders that are not federally regulated.
  • A possible slow-down in skyrocketing house prices in some areas of Canada, particularly Vancouver and Toronto.