Taking the "stress" out of the "test".

The new year is almost here and with it the new mortgage rules. If you are getting a new mortgage, renewing or refinancing one you will have to prove that you can qualify at an interest rate substantially higher than the one you are actually getting.

The OSFI (Office of the Superintendent of Financial Institutions) will now require banks to ensure that anyone with 20 percent or more down payment can pass a “stress test”, as has been the case since January of 2017, for applicants with smaller down payments who require mortgage insurance.

This will be the seventh round of rule tightening since July 2008 aimed at curtailing the amount of debt that Canadians and financial institutions take on.

This one is “the big one”.

It is expected that as many as 100,000 potential homebuyers will be affected by this policy change according a report published by Mortgage Professionals Canada, an industry group.

Here’s how the new rules might affect you:

If you’re planning to buy a house with a down payment of 20 percent or more next year

The stress test means that banks will have to qualify your mortgage application using the Bank of Canada’s five-year benchmark rate (currently 4.99 per cent) or the contract rate plus two percentage points.

This may force you to settle for a less expensive home than you would be able to buy today. Or, you might have to wait and save up for a larger down payment or get a co-signer.

It is expected that of the 100,000 or so potential home buyers that will be affected by the stress test next year, only about half will be able to make a different purchase than they had planned. The rest will give up on a home purchase.

Mortgages renewing

Lenders don’t have to apply the stress test to clients renewing an existing mortgage.

This means that if you fail the stress test, you’ll probably get stuck renewing with your current financial institution, without being able to shop around for a better rate.

This could result in renewing borrowers being forced to accept uncompetitive rates from their current lenders.

Mortgage refinances

Any material change to your existing mortgage will result in you having to qualify using the new stress-state rates rather than your existing contractual mortgage rate.

Example: You have a home valued at 800,000 with a renewing mortgage of 300,000 and you would like to add an additional 50,000 to help our kids with a down payment for their purchase. Your bank is offering  new five year fixed-rate mortgage at 3.3 per cent.

Today, your lender would make sure that you can take on a $350,000 loan at 3.3 per cent.

Starting Jan 1, 2018, your bank would have to qualify that same loan using a 5.3 percent rate. If you’re close to the borrowing limit today, you might have to settle for a smaller loan or no increase at all.

Exceptions to the new rules

The OSFI have allowed for some measures to make sure the new rules don’t disrupt transactions that are underway by not yet completed in early 2018.

If you sign a purchase agreement on a new home before Jan. 1., lenders won’t have to apply the stress test even if you apply for a mortgage in the new year, they will recognize the date the contract was accepted.

This allows for pre-construction sale and purchase agreements in particular, there is no current announcement on when or if there will be a cut off date for transactions.

If you are pre-approved for a mortgage, some lenders will give you 120 days starting Jan. 1 to buy your new home under the old rules.

The same applies for mortgage refinancing. If you have a mortgage refinance commitment in place by Dec. 31, you have 120 days to follow suit, or the maximum time fame the applicable bank allows for.

The credit union factor

The (OSFI) rules only apply to federally regulated financial institutions, meaning Canadians might be able to continue borrowing without a stress test if they turn to provincially-regulated credit unions.

In the past, however, credit unions have voluntarily adopted new federal standards on mortgage rates “pretty quickly,” but generally adopting rules on a voluntary basis means they would be able to make some exceptions, this has been the pattern in the past.

Credit Unions have traditionally responded to other stress testing requirements using their own watered down calculations such as using their three year fixed discounted rate instead of the much higher Bank of Canada benchmark, but as a result have experienced such high volumes for uninsured mortgage transactions some companies have had to stop taking applications altogether or require up to 5 weeks to process the file.

While a credit union that has voluntarily adopted the stress test might make an exception for a client with a very strong credit score and large down payment, they are not in a position to service the volume of applications expected to be turned away by the banks. Credit Unions also pride themselves on doing “the right thing” for their membership and will not want to be seen as the path of least resistance for borderline clients or as a means to circumvent Federal mortgage rules.

The best advice today would be if you are even remotely considering any move that requires a mortgage in the new year, get in touch with your trusted Mortgage expert before the end of the year.