What the new stress test is all about?

Monday Oct 24th, 2016


It’s been a week since the new mortgage rules have been in the effect in Canada. And I’ve been inundated with questions regarding their meaning and who is going to be impacted by them.

So starting October 17, 2016 all insured mortgages (high ratio mortgages with Loan-To-Value with 80% or less i.e., if your down-payment is 19.99 % or less) will be tested at a dramatically higher interest rate than the one actually being offered by your lender. That stress test rate is based on the Bank of Canada’s posted five-year fixed rate (currently 4.64 per cent).

For instance: To qualify for the interest rate to be paid for your mortgage for the 5-year fixed rate, you will have to qualify for a higher interest stress rate then the one you are actually going to pay. That is, if your downpayment is less than 20% and  your lender’s advertised special rate for you is 2.5%  then from now on to qualify for it, you have to prove that your can qualify for 4.64% mortgage based on the Bank of Canada posted rate. Basically, you are able to withstand a 2.14% increase in the interest rate.

Essentially, you’re not going to pay more, you’re going to be approved for smaller mortgage.    

Why implemented? To presumably stop the high real estate prices in Toronto and Vancouver and create financial stability.

Losers: The market consensus is that the biggest losers will be the first-time buyers who are largely represented by the young families or families with young kids and moderate income. That is, the whole middle class of Canada. Basically, for some Canadian real estate markets it means that many will simply qualify for smaller mortgages and settle with smaller houses or houses requiring lots of renovations. For Toronto (including GTA) and Vancouver, the new rules will simply eliminate the whole segment of first time buyers who even before were struggling to save up enough money for the downpayments.  

When we will see any changes in the real estate market?

Not right away and not everywhere for sure. When I was in the university, one of my economics professors told us that we should compare the economy with a freight train and not with a car. The freight train needs a longer time to speed up and consequently needs a longer time to make a complete stop. Therefore, we need some time to see a visible impact on the economy and the real estate prices.

Unfortunately, for many buyers in Toronto and GTA the impact on prices could be a very minuscule because of foreign money and the downpayment gifts from family to many new buyers.

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