One of the bigger developments in the Canadian real estate industry to break near the end of 2017 was the introduction of new rules from the Office of the Superintendent of Financial Institutions (OSFI), which announced they will require all homebuyers taking out mortgages from the lenders it regulates to start meeting a “stress test”.
In short, here’s how the so-called “stress test” works: any buyer going to one of the country’s Big Five banks for a mortgage — be it BMO, CIBC, RBC, Scotiabank or TD — will need to prove that they can actually afford the Bank of Canada prime rate, even if the lender ultimately intends to give them a lower one.
So, if the prime rate is 4.99%, then the buyer would have to show they can afford a 4.99% interest rate, no matter whether or not they already possess the kind of exceptional credit to be offered a mortgage at 2.99%.
The new rules took effect on January 1.
Despite this “stress test” potentially disqualifying upwards of 10% of prospective consumers who have down payments of 20% or more, perhaps the real question is this:
Could it actually end up benefiting first-time homebuyers?
The answer, and it might surprise you, is a resounding YES!
Sure, while a 2% point difference doesn’t sound all that big, the truth is, it’d compute to hundreds of dollars every month on a typical mortgage. This would, in effect, scale back the amount for a house that many can afford.
And with so many current homeowners who were planning to ‘graduate’ to a more expensive home no longer able to qualify for bigger mortgages, the “stress test” will obviously take several transactions out of the market.
As a direct result, prices are likely to drop, obviously encouraging an untold amount of first-time buyers back to get back into the game, after having felt so frozen out during 2017’s year of soaring costs and out-of-reach affordability.
Moreover, consider the fact that first-time homebuyers typically don’t have a 20% down payment to begin this. Which means, when it comes to taking out mandatory mortgage insurance, really, they’ve already been subject to the rules that the new “stress test” enforces for a long, long time.
In other words, the playing field looks like it’s been levelled! We suggest taking advantage of it while you still can.