From 1st January 2018, any Canadian seeking mortgage from a federally regulated lender will be subjected to a mortgage stress test before they are granted the lending facility. It implies that mortgage seekers will now have to qualify for BOC’s 5-year benchmark rate for the conventional mortgage or qualify at +2% if the rate is more than the benchmark rate.
With this, if you get pre-approved at 3.5%, the interest rate which you will qualify at will be 5.5% and this will without a doubt reduce people’s buying power.
In finance lingo, stress tests refer to various approaches to evaluating worst-case scenarios of different investments. With regards to mortgages, stress tests are used to determine the risks associated with each loan application.
It seeks to determine the amount the borrower can afford concerning their debt to income ratio, and if they would still be able to meet the repayment obligation if the rates were increased. For instance, if the applicant faced a temporary job loss, how would the factors play out as far as repaying the loan is concerned?
These and other factors are what is taken into consideration in the stress test to determine the likelihood of a borrower defaulting on their loan repayment.
Starting January 2018, home buyers will not just need to qualify for the rate negotiated in their mortgage contract, but must also qualify at the current rate plus 2% or the bank’s 5 year posted average, or whichever is higher. In this manner, banks will be certain that the borrower will still be able to make repayments, should interest rates go higher than what they are at the moment of application.
The other condition for the stress test is that borrowers are not allowed to go beyond a 44% Total Debt Ratio, and it is a requirement that they spend less than 32% of their income on housing costs like real estate taxes, mortgage payments and other utilities.
Prior to the new regulations, it was only borrowers who could not raise the 20% down payment who were subjected to the stress test. But from January 2018, all borrowers will be subjected to the test, and consequently, a large number of people will miss out on the mortgages provided by federally regulated lenders.
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