The Office of the Superintendent of Financial Institutions (OFSI) and the Minister of Finance, Canada’s banking regulators, tightened the rules around the mortgage stress test on June 1.
Under the new requirements, all mortgage applicants must be able to afford their mortgage at an interest rate of 5.25 per cent or two per cent over the contract rate, whichever is higher, regardless of their down payment.
How will the new stress test impact home buyers?
Regulators introduced the stress test for insured mortgages in 2016 and for uninsured mortgages in 2018. This original stress test required borrowers to qualify at the greater of the benchmark posted rate for a five-year term or 200 basis points over the contract rate. This change reduced home buyers’ purchasing power by approximately 20 per cent and was a key factor behind the decline in housing market activity in 2018 and 2019.
This most recent adjustment to the stress test is anticipated to decrease the amount home buyers’ can borrow by approximately four per cent.
“While we saw a large impact on home buyers the last time the stress test rate increased, the magnitude of these changes is quite different,” said Keith Stewart, REBGV Economist. “A four per cent reduction in a home buyer’s maximum budget is unlikely to move too many people in or out of the market, or change the type or location of home they choose to buy.”
The new rules will dampen mortgage credit growth, but should have a modest effect on home sales and prices in the region going forward, according to Stewart.
If you’re looking to get into the housing market today, it’s critical that you work with your REALTOR® and mortgage specialist to carefully review your financial situation and ensure that you’re always making responsible, long-term borrowing decisions.