OSFI stress test

Insured and Uninsured Mortgage Stress Test Changes Confirmed for June 1

Starting June 1, both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed on Thursday that it will move ahead with its stress test changes first announced last month, which will apply to uninsured mortgages (typically those with more than a 20% down payment).

Soon after, the Department of Finance confirmed it will follow OSFI’s lead, and apply the same higher qualifying rate to insured mortgages, or those with less than 20% down.

In both cases, borrowers will need to prove they can afford payments based on the higher of the contract rate plus 2%, or a new floor rate of 5.25%, up from the current 4.79%.

“The recent and rapid rise in housing prices is squeezing middle class Canadians across the entire country and raises concerns about the stability of the overall market,” Finance Minister Chrystia Freeland said in a statement. “The federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages…It is vitally important that homeownership remain within reach for Canadians.”

Both OSFI and the DoF said they will review the floor rate annually, likely each December at a minimum.

The Impact on Borrowers

Applying the higher stress test to insured borrowers will impact roughly 1 in 5 mortgage borrowers, according to data from the Bank of Canada. It will also take direct aim at first-time borrowers who are more likely to be putting less than 20% down on a mortgage.

The higher minimum stress test is expected to cut maximum buying power by between 4% and 4.5%. For a median-income household, that would reduce the maximum purchase price from $442,000 to $422,000, according to previous estimates from National Bank.

It’s estimated that this change will reduce purchasing power for uninsured borrowers by between 4% and 4.5%. By comparison, the B-20 stress test implemented in January 2019 requiring homebuyers to qualify at the higher of either the 5-year posted rate or the contractual rate plus 200 basis points reduced purchasing power by 22%.

“Today’s news is both bad news and good news for (first-time buyers),” wrote Rob McLister, mortgage editor at RATESDOTCA. “Obviously, it cuts buying power, but that also means fewer people will be able to bid as much for homes, reducing some price pressure.”

Mortgage Professionals Canada issued a statement to members on Thursday, noting it was disappointed that the minister decided to move so quickly in applying the stricter stress test to insured mortgages.

“Given the traditional audience for insured mortgages, namely young aspiring middle-class families, single individuals, and the recently separated, all owner occupiers of the properties they purchase, MPC would have preferred the insured qualification rate had not been increased in the interest of this community,” the association said. “Given the rapid rise in prices, making qualification more stringent now will disqualify many of the Canadians the government has promised to support.”

Bank of Canada Concerned About Home Prices, Household Debt

The new stress test changes fell on the same day that the Bank of Canada voiced concern about unsustainable house prices and growing household debt.

“It is important to understand that the recent rapid increases in home prices are not normal,” Bank of Canada Governor Tiff Macklem said following the release of the Bank’s annual Financial System Review, which found the share of highly indebted households taking out mortgages is now up to 22%.

“Some people may be thinking that the kind of price increases we have seen recently will continue. That would be a mistake,” Macklem added. “Interest rates are very low. That means there is more potential for them to go up…Borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates.”

The Bank also unveiled a “House Price Exuberance Indicator” meant to measure nine major markets across Canada for expectations that local home prices will continue to rise. The indicator currently finds that the Toronto region, Montreal and Hamilton are in exuberant territory, with Ottawa not far off.

  1. I make 120,000/year and i have basically been squeezed out of owning a home in the GTA. That is just insane!

  2. Same here.

    I don’t make a lot of money. $97k for our household. Which is pretty good as far as I’m concerned. We’re blue-collar folk.

    A lot of people talk about the increase reducing the overall ability to borrow by 4%. But they aren’t talking much about the initial problem of the stress test to begin with. I think prime is now 1.75 on a 5 year fixed. Even on a modest $250k home, change it from 1.75% to 5.25% then see what the monthly payment is on your mortgage. That’s where the problem lies.

    To have it fit my budget now, (12-1400/month) I have to now look for a house that is nearly $100,000 less. So a total of $150,000. Good luck finding anything other then a trailer for that money. My curious concern is where does all that interest go while your paying the stress test. Not against your principle- that’s for sure. But the banks, they love it. It’s not like they loose money if you put less then 20% down- CMHC insures that.

    The bank wins in all cases. Not the consumer.

    To sum it up. The five year stress test effectively prices me out of the market. And a lot of people I talk to. So what choice do I have. Renting.

    It sucks to see that money go to waste. But you have to live somewhere.

    Government needs to get rid of the new buyers “Tax” they call a stress test. It’s absurd and applying it to people that have more then 20% down is just a further insult. If anything they should put a bid cap on properties. No more then 5% of asking price. Tops.

    Also, no foreign buying. Not a vacant tax, outright ban the sale of homes to non-Canadians.

    As for me and my downpayment I’ve saved, I’m going to invest it and make it work for me in the meantime.

  3. Just curious is this is for new mortgages or renewals too? It could be catastrophic if families had to leave their homes as they could not pass the new stress test on renewal. Think of a family who has to renew during parental leave, or their income shows lower due to loss of income during the pandemic set backs. There are a myriad of reasons people would not be able to pass the stress test, and yet still afford their current homes. I really hope this is for new purchases only.

  4. Just another way of taking more from people. This tax should not be able to be just handed to a sale already completed. If I would have known that this is the sort of thing that could have come up with my current Situation I would’ve possibly made a different decision to buy December 1 of 2020. Feels like being extorted buy a legalized mafia. Hearing their voice speaking to me right now is like “pay up now”. We don’t care that you work yourself to death to try and own your own home while you have a disabled child at home with a stay at home wife to take care of him. Man up or move on.

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