Clarifying the New Mortgage Stress Test
When you’re a personal finance expert, people don’t always agree with what you say 100% of the time. At the beginning of the year I made an appearance on the Global Morning Show to discuss how the new mortgage rules affect new homebuyers. During the segment, I mentioned how the new mortgage stress test could reduce the purchasing power of homebuyers by about 20%. After my segment aired, I received a note from a mortgage broker.
I just watched your segment on Global News, and while I believe some of your points were good regarding the new stress test rules, your assessment of a 20% shift in affordability seems grossly overstated. As you likely are aware, most lenders have been using some form of a stress test for quite some time, wherein buyers were being qualified at a qualifying rate well above their borrowing rate — recently changed from 4.64% to 4.99%. This was applied to conventional buyers who weren’t taking a 5 year fixed rate or longer. There is a very narrow segment of the population — conventional buyers needing to use a 5 year fixed rate to get the biggest mortgage they could afford — who are impacted by 20% or more, but generally the affordability delta is 7%.
I just wanted to pass along my thoughts, as I believe that the media has overstated the impact of this change, and I fear that this will have more impact than the math supports.
There still seems to be some confusion out there about the new mortgage stress test. I already wrote an in-depth post to help clear up some of the confusion, but I wanted to write a follow up post to specifically address this mortgage broker’s points.
Prior to January 1, 2018 federally regulated lenders required that 1–4-year fixed and variable-rate borrowers qualified at the Bank of Canada posted rate (e.g., 4.99% on Dec. 31, 2017). And insured borrowers had to qualify at that same rate. So it’s true that OSFI’s change doesn’t affect all buyers.
“Nonetheless, it is very accurate to say that the maximum theoretical buying power will drop by roughly 18+% for virtually all uninsured borrowers. I say ‘virtually’ because some borrowers could pay cash if they wanted to but decide to mortgage anyways,” said Robert McLister, founder of RateSpy.com and mortgage planner at intelliMortgage.com.
People who had high debt ratios prior to January 1 could put down 20% and choose a 5-year fixed to avoid the stress test. This is no longer possible unless they choose a higher cost credit union or alternative lender.
Regarding his point that “There is a very narrow segment of the population” who needs to use a 5-year fixed to get the biggest mortgage they can afford, Bank of Canada FSR data suggests this number is around 17% of uninsured borrowers. That’s not insignificant. And these people are partly responsible for bidding up home prices at the margin. OSFI’s rule change will therefore have a measurable effect on housing demand, McLister said.
I just wanted to thank this mortgage broker for reaching out to me. I strive to provide accurate information to help Canadians make well-informed financial decisions. Feel free to send me your comments and questions anytime. I might even feature them in a blog post.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.