Stress Test

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The Office of the Superintendent of Financial Institutions (OSFI) introduced a stress test as a new way to qualify buyers. A stress test, as you know it, will tell you how well your heart handles its workload. A mortgage stress test will tell you how much financial pressure you can carry. Mortgage stress tests were used in the past to qualify buyers who had less than 20% down payment.  These mortgages are called insured mortgages. About 54% of buyers have insured mortgages. As of January 2018, every buyer, insured or uninsured, will be qualified based on the stress test.

With the stress test, buyers must qualify if interest rates rise above the five-year benchmark rate from the Bank of Canada or 2% higher than the bank discount rate, whichever is higher.  As a result, buyers will qualify for about 20% less mortgage. A family with an annual income of $100,000 will qualify for around $726,000 based on an interest rate of a 2.8% and a twenty-five year payment plan. With the new system, the family will qualify for about $574,000. That’s a reduction of $150,000. When buyers qualify for less, it will cause home prices to drop.

With the implementation of Ontario’s fair housing plan and two interest rate increases this year, home prices came down by about 20% and may drop another 10%-20% as of January 2018. This will affect move-up buyers the hardest as their equity will be eroded, and at the same time, they will qualify for less mortgage, reducing their buying power.

The Ontario Real Estate Association (OREA) said that OSFI changes are “overkill” and that they “will hurt middle-class families and punish careful savers most. It’s time for governments to hit the brakes on more demand-side policy interventions and take a wait and see approach.”

Royal LePage CEO Phil Soper said, “The 416 has shaken off the spring-triggered market correction and is moving along quite nicely. But the 905, which relative to the underlying value of the land, overshot more than the core did in 2015 to early 2017 market expansion — it’s still in tenuous recovery mode.”

With the new qualifying guidelines, some buyers will be forced out of the market and continue to rent, while others will choose to buy a less desirable property. Some buyers will move to small towns where prices are reasonable and well within their qualification range.  Prices on homes with registered basement apartments will climb because rental income from the secondary suite will help buyers qualify for a larger mortgage. The extra income from the apartment will assist buyers to quickly pay down their mortgage and build equity.

Owners with pre-existing mortgages will not be required to take the stress test at renewal unless they choose to refinance or apply for a line of credit. It would become more difficult to shop around for mortgages at renewal times because changing institutions will trigger requalification based on the stress test.

“We have strong population growth, we still have relatively low interest and job growth has been robust. Consumers are confident, so it’s not as if this will drive the market down abruptly but it will have a significant dampening impact,” says BMO financial group chief economist Doug Porter.

This new measure will make homeownership affordable. The rental market is at an all-time high and investors should take advantage. The demand for housing will increase with immigration and create an upward pressure on home prices.  The stress test will only slow the market down temporarily.


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