The Bank of Canada’s mortgage stress test gets tougher for uninsured mortgages by a minimum of 5.25%. The federal government is attempting to try and cool the red-hot housing market with new stress test rules. Announced by the Office of the Superintendent of Financial Institutions on May 20, the new calculation will be set to a rate of plus 2% or 5.25%, whichever is higher. If your residential mortgage has a down payment of 20% or greater, click and know more here.
What is a stress test?
If you are a buyer looking to get an uninsured mortgage, you must pass a mandatory stress test. You will need to prove that your financial situation, despite the changes, is fit to make the mortgage payment without fail. A B-20 stress test did this by increasing the interest rate to 2% or 4.79% again, whichever is greater. To be more specific, you need to qualify for your mortgage even if the interest rates were 19 times higher. The new stress test rules as of June 1 increased this further to 21 times higher than the original rate.
Need Of A New Stress Test
The stress testing was first brought into action in 2018 by the OSFI to ease the real estate market in Ontario and BC. To support this effort, the Bank of Canada increased the overnight interest rate consistently throughout the year. However, it fell by 0.25% in March 2020 because of COVID-19. Fear started gripping the housing market then.
On recovery of the pandemic, the interest rates still stayed low. The BoC wanted to wait to visualize the vaccine rollout before raising it. In the meantime, the real estate never ceased heating up, leading to a highly distorted activity in the biggest markets of Canada. Reports state that borrowers went into heavy debt. Therefore, OFSI was left with no choice to implement new rules with a higher threshold for the mortgage stress test. The reason for a more intensive decision is that the OSFI wants to safeguard the banks they regulate.
Impact Of New Regulations
The increase in the stress test minimum will bring down your purchasing power when it comes to properties. You have to understand that though the regulation targets the borrowers, it is an act by OSFI to support the real estate market. The change is a result of rising prices, bidding wars, high debt levels and low supply. You can never predict where the interest rates will finally land when everything goes back to normal. It is going to be difficult for first-time buyers concerning the budget. Few of them will get their parents to co-sign their mortgages, which will be a challenging situation for many.
The new rules are applicable only to uninsured mortgages currently. The Department of Finance is making a statement to apply the same to insured mortgages in the future. Talk to your broker more about this so that their expertise will guide you to perceive the mirage ahead.