Over the last decade, the federal government has introduced new regulations to help secure the real estate market. The latest round of rules includes something called a ‘stress test,’ which analyzes an applicant’s financials.
The news has created a lot of buzz nationwide, as some critics believe it would make it harder for Canadians to finance a new home. So today, we’re going to break everything down in simple terms and discuss how this stress test will affect the real estate market.
In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced a series of sweeping changes aimed predominantly at the mortgage industry. The OSFI is the sole banking regulator in the country and reports directly to the Minister of Finance. The purpose of this organization is to protect Canada’s banking institutions by implementing protectionist measures.
Insured Vs. Uninsured
Before we talk about this stress test, it’s important to understand the difference between an insured and uninsured mortgage. In Canada, homeowners are legally required to purchase mortgage insurance if they put less than a 20 percent down payment on the property.
On the other end of the spectrum, if you put down a 20 percent down payment, you don’t need to purchase this type of additional insurance. So to be clear, mortgage insurance is a protectionist measure that ensures the lender is compensated in case the borrower defaults.
The Stress Test
Prior to contrary belief, the stress test has been around for many years, as insured borrowers always had to undergo this ‘test.’ Under the new regulations determined by the OSFI, uninsured individuals will be subjected to the stress test as well.
But what is this test exactly? According to CBC News, “The stress test is designed to simulate a borrower’s financial situation by assuming they would have to pay back the loan at the posted average.” In plain terms, the banks want to see if you can make your mortgage payments if interest rates increased dramatically.
Impact On The Real Estate Market
The new regulations came into effect on January 1, 2018, and the short-term implications can already be felt across the country. CBC journalists looked specifically at the city of Ottawa and discovered the housing market spiked by 25 percent in December 2017.
Experts suggest the reason is due to buyers wanting to avoid the new 2018 stress test rules and were eager to scoop up a property. Data from other Canadian cities haven’t been analyzed, but some insiders suggest this spike was nationwide.
The luxury market is expected to be the hardest, along with those looking to upgrade to a bigger, more expensive home. The details of the stress test stipulate that homeowners applying for a mortgage need to qualify at their negotiated rate plus two percent or an average posted rate of 4.89 percent (whichever represents the higher figure). Therefore, a family with an income of $100,000 can no longer qualify for a $750,000 home with a 20 percent down payment.
If you’re thinking about buying property in the future, be prepared to have your financials analyzed and even if you’re planning on putting down a 20 percent down payment. Keep in mind these new regulations are meant to protect the Canadian banking system, and you may need to save a bit more money saved before purchasing your next property.