There has been a lot of hype about the new mortgage regulations that are set to take effect on January 1st, 2018. Just about every new inquiry I have been getting lately results in a question about how the new mortgage regulations will affect them.

If you have a home purchase closing, and you entered into your contact prior to December 29th, 2017 (the last business day the year), then you will be exempt from the new regulations and it will just be business as usual when you arrange your mortgage.  Even if you don’t start shopping until after January 1st.

In late 2016, we saw a stress test implemented for all insured mortgages.  This applied to all mortgages on purchases with LESS than 20% down payment.  Because most lenders bulk insure their mortgages on the back end, this also led to borrowers having to pass the stress test to get the lowest mortgage rates, regardless of how much they had for down payment.  If a borrower with 20% or greater down payment failed to pass the stress test, then they could still qualify, just at a slightly higher rate.

Come January 1st, this will no longer be possible.  ALL mortgages will have to qualify passing the stress test. The result will be an approximate 20% drop in buying power.  In other words, the maximum mortgage you will qualify for will be about 20% less than what you would have qualified for if you didn’t have to pass the stress test.

So if you previously qualified for a mortgage of $800,000, you will now only qualify for around $640,000.

While this will definitely have an impact on the housing market, it will not be enough to cause any major crash.  I would expect to see a minor correction in home values, perhaps up to 10%.

So what is this stress test that everyone is speaking about?

It means that you will have to qualify based on the higher of the benchmark rate set by the Bank of Canada, or 200 basis points above your contract rate (the rate your payments are based on).   For example, if you are applying for a mortgage with a 5 year fixed rate of 3.39% (the going fixed rate at most banks), you would have to qualify as if the rate were 5.39%, which is 200 basis points (2%) higher than the contract rate.  Since 5.39% is higher than the current benchmark rate of 4.99%, then this is the rate you would have to qualify based on.

Now let’s say you want a 3 year fixed which can be found as low as 2.64%.  Add the 200 basis points for the stress test and you have a rate of 4.64%.  As this rate is below the benchmark rate of 4.99%, the stress test would then be based on the 4.99% since it’s the higher of the two.

The stress test is nothing new.  It was first implemented about 4 years ago on variable rate mortgages or terms shorter than 5 years.  So if you got your mortgage less than 4 years ago are currently in a variable rate, or shorter term mortgage, then guess what?  You passed the stress test!

You can read more about the new regulations here:

http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/B20_dft_nr.aspx
http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b20_dft.aspx