Stress Test Targets Conventional Mortgages

In a release Thursday, the Office of the Superintendent of Financial Institutions said, "the new qualifying rate for an uninsured mortgage – where borrowers have at least a 20% down payment – will rise to either the mortgage contract rate plus 200 basis points or 5.25%, whichever is higher."

Currently, the stress test sits at 4.79%.

The decision to impose the more stringent conditions is to dampen the financial risks in our housing sector. It's intended to protect against foreclosures should interest rates suddenly rise fast and far. 

"In a complicated and sometimes volatile housing market, the need for sound mortgage underwriting cannot be underestimated," OSFI Assistant Superintendent of Regulation Ben Gully said.

"The rate in place as of June 01st, 2021 will help support financial resilience should economic circumstances change, while our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system."

As part of the new framework, OSFI announced it would launch a process to review the qualifying rate at least once a year in December. OSFI said that timing would allow it to adjust regulatory conditions well ahead of the busy spring selling season.

For clients, this means that lenders will be calculating your mortgage eligibility at a monthly mortgage payment of $552.00 per $100,000.00 mortgage funds. Today's average five-year fixed-term contract rate works out to a mortgage payment of only $374.00 per $100,000.00. That's a large margin of safety and means that accessing conventional mortgage funds will be shaved by approximately 4% - 4.5% at the new stress-test rate.

For example, a client purchasing a $550,000 property with a 20% down payment will see an approximate decrease of $20,000 in their borrowing power next month. So, the bottom line is that access to cheap mortgage funds will be further restricted. 

If you have a large downpayment or 35% or more equity in your home, that doesn't change this cutback. You have to have the eligible income to support your mortgage using the new 5.25% interest rate. There are other options for clients needing higher mortgage amounts, but they come with higher interest rates and additional costs. 

If you need higher funding for your conventional mortgage, give me a call to explore your options. They are out there, but you won't get them from your bank.