Changes to the Stress Test: Why the sky isn't falling.

You may have read headlines mentioning that OSFI (Office of the Superintendent of Financial Institutions) is considering a June 1 “hike” to the qualifying rate (i.e., Stress Test). Qualifying rates were introduced to mitigate the risk of mortgage default by ensuring that borrowers can continue to make their payments in the event that mortgage rates increase over the course of their term. The projected Stress Test rate increase would be from 4.79% to 5.25% (or the contract rate + 2%, whichever is greater), which is not much more than the 5.19% rate that was in place until spring of last year, and is less than the 5.34% that was in place prior to the 5.19% qualifying rate.
 
What does this all mean? For example, if client gets a mortgage rate of 2.09% today, they would have to be able to qualify for a mortgage with an interest rate of 4.79% (which is greater than 2.09% plus 2.00%). Many news outlets, mortgage agents, and others are making this sound like it is going to have a major impact on home-buyers, and in my opinion this is definitely not the case.
 
First, the potential increase to the qualifying rate from 4.79% to 5.25% would only be for uninsured mortgages. The change would reduce an average borrower’s purchasing ability by approximately 5%. Here are the types of mortgages that are uninsured:

1. Purchases with more than 20% down (at big banks… see below for other lenders)
2. Rentals
3. 30 year amortizations
4. Purchase prices over $1 million

 
Second, OSFI regulates only the chartered banks in Canada; so not all lenders are directly impacted by OSFI’s decisions.

1. Monoline lenders are mortgage financing companies that typically work with mortgage brokers, and these lenders are not regulated by OSFI. Some examples are First National, MCAP, Merix, and RMG. Credit unions are regulated provincially, and some provinces apply OSFI’s rules, while others do not. These lenders may decide to mirror the changes proposed by OSFI, but may not.
2. When homebuyers put down 20% or more with a monoline lender, the lender often pays for the mortgage default insurance themselves, and therefore at 20% down the mortgage is not considered uninsurable, meaning the client could still qualify at the insured qualifying rate of 4.79%.

 
Third, many people are asking if the qualifying rate will increase for insured purchases. Based on what I’m reading, and what I’ve seen, the proposed changes are designed mainly to cool down some of the major markets with the million dollar mortgages and offers coming in up to half a million over list. The majority of purchases in Toronto and Vancouver are going for one million dollars and up, and in order to cool things down OSFI  is tightening up the lending guidelines on those uninsured transactions (i.e., over $1 million). The other bucket of uninsured mortgages that tend to be the riskiest to the lenders are those with 30 year amortizations, as stretched borrowers often need the 30 year amortization to qualify. The qualifying criteria already in place for insured purchases has already done a good job of limiting the risk of mortgage default on insured mortgages, and therefore I don’t expect to see a change in the qualifying rate for insured mortgage any time soon.