As midnight December 31st, 2017 rolled around, Canadians seeking a new mortgage, or those thinking about refinancing or renewing their existing one, had more to think about than just their new year's resolutions. Canada's federal financial regulator, the Office of the Superintendent of Financial Institutions' (OSFI), introduced a string of new mortgage insurance rules that kicked in on Jan 1st, 2018.
The foremost of these new changes is what's known as the "New Stress Test", which could potentially impact a large segment of Canadian homeowners, homebuyers and mortgage seekers. Sadly though, there has been a lot of confusion and miscommunication over what the new rules mean, and how they could impact your homebuying or home financing decisions.
Below, we explore four of the most popular myths surrounding the new OSFI rules, and try to demystify them for you.
OSFIs New Stress Test 101
Prior to the Jan 1, 2018 changes, OSFI had already instituted a more rigorous set of tests for homebuyers putting less than 20% down on their home purchases. Canadian's putting down 20% or more weren't obliged to seek mortgage insurance. This group of mortgages are known as "uninsured" mortgages. The probable assumption is that, if you have enough resources to fund more than 20% of your home, you're likely not going to fail to pay-off your mortgage.
The new stress test changes those assumptions. The tests will be applied equally to "uninsured" as well as insured mortgages. Under the new rules, all mortgages – regardless of how much down payment is offered – will be stress-tested:
- at a rate that's 2% higher than the rate that the lender qualifies you for; OR
- against the prevailing Bank of Canada (BoC) conventional 5-year mortgage rate (also called the 5-year benchmark rate) – which currently stands at 4.99%
So, what does this mean for you? Well, for instance, if you qualify for a 2.5% rate on your home loan, your lender is now obliged to test if you can afford 4.5% (i.e. 2.5% + 2% additional). If you can, you'll deem to have passed the test. If not...well, you fail the test!
Stress Test Myths Debunked
With almost 46%[i] of currently outstanding mortgages falling in the "uninsured" category, the new OSFI stress tests will impact a sizable number of mortgage holders – who previously didn't need to worry about mortgage insurance. While the explanation of the new stress test provided above seems straightforward enough, there have been many myths swirling around them. Let's look at some of more popular ones:
MYTH#1: I won't be impacted by the new stress test rules because I'm putting more than 20% down payment against my house.
FACT: False! The new rules will also engulf "uninsured" borrowers – including those that put more than 20% down. So, before you make an offer to buy a property, make sure you have the resources to carry a monthly mortgage payment that's at least 2% higher than what you could (otherwise) qualify for – regardless of how much you are putting as down payment.
MYTH#2: The new rules will impact those with poor or marginal credit. My credit record is spotless, so I don't need to worry about the new stress test.
FACT: Wrong again! While the new stress test is meant to encourage borrowers with precarious credit to rethink how much they borrow for their homes, these tests will be applied across the board – even to those with exceptional credit history.
MYTH#3: I have a stable job, and have some savings, in addition to a modest RRSP and TFSA. Even if I am stress-tested, it won't impact my finances too much.
FACT: That MAY be true, but it might not be!
Using some basic assumptions, such as Gross monthly income of $8400, Property Taxes of $400/month, and running them through an online home purchase affordability calculator (we've used one from Scotiabank), we can see the impact that the new stress test will have on your finances:
Prior to the new changes, based on a 2.99% rate over a 25-year amortization period, you could afford to buy a home costing just above $490K.
With the new rules factored in, testing you at a 4.99% rate, your home affordability drops to just $400K. It' doesn't matter how much you've saved – the new rules WILL have an impact on your finances.
Where once (prior to Jan 1, 2018) you could afford a mortgage of $483,994, the new rules limit your borrowing power to $393,779. These changes will affect how much you can borrow, and how much home you can buy!
MYTH#4: My mortgage is up for renewal this summer. I could be in jeopardy because I'll likely not be able to pass the stress test.
FACT: You MAY not need to worry about that!
The new stress rules will not apply to any existing mortgages – so long as you renew with your current lender. This may then have an un-intended downside too: You could be forced into accepting uncompetitive rates offered by your existing lender, without the flexibility to shop around for a better deal with a new provider.
Long-term Stress Relief
One very common myth out there is that, with interest rates at historical lows, there's no real reason to stress about the new stress tests. As long as you can afford to keep up with your existing mortgage payments, you should be fine.
And that might be the biggest myth of them all!
With interest rates at all-time lows, there's only one direction they can go – UP (unless there's some cataclysmic shock to the Canadian economy!). With the prospect of BoC interest rate hikes looming, homebuyers would do well to keep in mind that the monthly mortgage they pay today, may not be the same as what they could be forced to pay (come time to renew/refinance) in a few months. Likely, those future monthly payments will be higher.
So, the best way to achieve longer-term stress relief over the new stress tests is: Before you plan on signing on the dotted line for your mortgage, make sure you can handle higher mortgage insurance premiums as well as higher monthly mortgage payments.