Stress Test - Stress Out
It has now been a couple months since OSFI introduced its new mortgage lending guidelines which included a 2% stress test on all uninsured mortgages and the effects are beginning to be felt.
Here are some of things I’m seeing:
More Declines with traditional banks and lenders.
Borrowers being forced into more expensive alternative mortgage options.
It’s still busy…our office has received as many mortgage applications in recent weeks as we typically would at this time any other year.
Property values are still holding fairly steady for now.
Are lenders doing anything else differently?
It’s important to understand that all of the same underwriting practices are still being used. Lenders still take into consideration a borrowers income, employment, credit history and property on every file. Lenders still want no more than 39% of a borrowers gross income to go towards the cost of the property (mortgage payment, property taxes, heat and strata). Lenders still also insist that no more than 44% of your gross income goes to your total combined debts (home costs plus any other personal debts). It’s also important to remember that these “new rules” only apply to uninsurable mortgages, borrowers with less than 20% down payment have already been subject to a “stress test” since October 2016.
It can be argued that the new stress test was a prudent move by the government to save Canadians from over-extending. Take into consideration that Canada’s current debt-to-disposable income ratio is 170% household debt needs to be monitored. It’s also important to realize the historically low interest rates we’ve come to enjoy are now beginning to rise. Will borrowers still be able to afford their mortgage upon renewal at an increased interest rate?
Consider the above ratio that lenders allow for 44% of your gross income to go towards personal debt. Once CRA taxes are factored in a borrower is closer to 58% of their take home income going towards debts. Then add a cell bill, cable, car loan, utilities and hopefully some groceries and there isn’t much left!
What does all this mean going forward? Well it means there will be a shift in how lenders give out mortgages. If you are a buyer keeping well within their means and you qualify stress test and all, then there is a nice low interest rate waiting for you. If you’re a borrower that is comfortable with the cost of homes in the Lower Mainland and doesn’t mind a significant portion of their income going towards that property there is probably a mortgage for you as well albeit a little more expensive.