On June 1, the enhanced mortgage “stress test” that had been suggested in April will go into effect for borrowers who have insured and uninsured mortgages. In most cases, any mortgage where the down payment exceeded 20% of the purchase price is considered an insured mortgage. The Stress Test simply means that applicants need to be able to prove that they can afford an interest rate of 2% plus the contract rate or the benchmark rate of 5.25%; whichever is greater. The current rate on the existing stress test is 4.79 per cent. 

The mortgage stress test, formally called the B-20 Guideline, has been a part of the lending process for high-ratio mortgage applicants since July 2016 and for all mortgage applicants since January 2018. The purpose is to reduce the likelihood of financial difficulty or foreclosure should rates rise. In Canada, mortgage terms cannot exceed 10 years. Most common term is 5 years. Assuming a 5 year term is used over a 30 year amortization, you are looking at 5 renewals,  and at each renewal, the interest rate can change to meet market conditions at that point. Another rationale behind the stress test was to help Canadians get out of household debt. The average Canadian household owes 170 percent of their disposable income; in other words, Canadians owe $1.70 for each dollar they bring in after taxes. As housing prices and interest rates both look set to rise in Canada, many people who want to purchase can be squeezed out of the market. The fact that interest rates have remained so low for so long may have many buyers with a false sense of security. Should the financial situation change between renewal, homeowners may not be able to afford their new payment. This will make things more difficult for both first-time homebuyers and sellers. For sellers, this means that there will be fewer people who can gain approval for home loans, which will reduce demand – and could soften home values. Even if values continue to rise, some of the high values that have emerged in some of Canada’s most desired housing markets may shrink. For the first-time homebuyer, down payments of at least 20 percent are less common than they are for people who have built up equity in prior home purchases. When the most recent change to the stress test came, back in 2018, borrowing power was reduced by 22 per cent across Canada. According to projections, the newest change would only decrease borrowing power by approximately five per cent. For home builders and real estate associations, the impact will come in the form of fewer new home construction orders and fewer home sales.

Here are some commonly asked questions (with answers):

  1. If a lender turned in a mortgage insurance application before June 1, 2021, and the application comes back in with changes on or after that date, will the application be subject to the enhanced stress test?

So long as the property and the borrower are the same, the stress test will remain the same as well.

  1. If a lender cancels a mortgage insurance application that came in before June 1, 2021, and needs to submit it again or reopen it on or after that date, will the application be subject to the enhanced stress test?

So long as the property and the borrower are the same, the stress test will remain the same as well.

  1. If a borrower has lender pre-approval before June 1, 2021, will the enhanced stress test apply if the signed purchase and sale agreement is dated on or after that date?

If there is a binding agreement from the lender to make the loan, signed and dated before June 1, 2021, then the prior stress test would be used.

  1. If the borrower has a signed purchase agreement dated before June 1, 2021, but did not have a pre-approval in place, would the enhanced stress test apply?

If there is a binding purchase and sale agreement signed and dated before June 1, 2021, then the prior stress test would be used.

  1. What if the borrower changes lenders despite having had a binding loan commitment with one lender before June 1, 2021?

If the new agreement is dated on or after June 1, 2021, then the enhanced stress test would apply.

  1. Is the enhanced stress test applicable for transactions involving portfolio insurance?

All loans that will have insurance (both portfolio and transactional insured) must meet the standards of the enhanced stress test.

  1. Will the stress test apply to private mortgages?

No. At this time, private mortgages do not require a stress test. However, a prudent private lender should take stress tests into account  when necessary if the applicant’s strategy is to refinance in order to pay off the mortgage.

 If you have the means to afford a mortgage on a home and want to avoid stress tests, consider pursuing a private mortgage. You get to move into your new home, while you work on cleaning up your financial picture so that, upon renewal, you can qualify for a traditional mortgage. Our private mortgages are transition mortgages. Get in touch today.

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