How the Stress Test changed affordability

The new OSFI minimum qualifying rate, more commonly known as the “stress test”, is a requirement for all home buyers of residential properties including pre-construction condos, resale, freehold, and others requiring a mortgage.  There was a time when all home buyers with down payments of 20% or greater are not required to purchase mortgage insurance, and therefore forgo any preliminary testing and it only applied to high ratio mortgages of less than 20% down however these rules changed in January 2018.

Today all Home buyers applying for new mortgages, regardless of the down payment size, will be tested at either greater than the five-year benchmark rate, or two percent higher than their actual mortgage rate- whichever one is higher.

This equivalent of a 2% rate hike will equate to a drop of approximately 15-20% in purchasing power.

Ratehub.ca has a Mortgage Affordability Calculator, here is an example of how qualifying ratios have changed because of the introduction of the stress test.

OCTOBER 2017 Vs. JANUARY 2018

Example:

Buyer’s mortgage rate is lower than the bank of Canada’s five-year benchmark rate

Current Bank of Canada Benchmark: 4.89%

Annual Income: $100,000

Down Payment: 20%

5 Year Fixed Mortgage Rate of 3.09%

Amortized over 25 Years

Results:

October 2017  $706,692  maximum affordability:

January 2017  $559,896  maximum affordability:

*Remember, the new stress test rules will not apply to mortgage renewals as long as you remain a client of your existing lender, (financial institution you presently have your mortgage with)