Real estate and the new stress test

Special to Okanagan Weekend

On Oct. 17, the Superintendent of Financial Institutions unveiled the new stress test for Canadians.

Many were unaware of the stress test imposed on qualified buyers with down payments of less than 20 per cent down.

While these mortgages are insured by a third party, those buyers have been required for the past year to qualify at the Bank of Canada qualifying rate, which currently is at 4.95 per cent, even though five year insured money can be found as low as 3.9 per cent.

The new stress test will affect consumers, buyers and borrowers alike with a down payment of 20 per cent or greater.

Borrowers will now have to qualify at a rate two per cent higher than their actual contract rate.

The current five year term with 20 per cent down is 3.39 per cent and that is the amount your payments will be paid on, but you will have to qualify at 5.39 per cent, substantially reducing your purchase price ceiling.

To have a better understanding, I contacted Shaun Pierce, owner of Creative Mortgage, to discuss the new stress test and its effects on borrowers. Here is what Shaun has to say: “Borrowers will have to meet the new stress test requirements starting Jan.1 2018. This means if the rate the client was to pay is 3.39 per cent currently, the client would need to qualify at 5.39 per cent.

This will affect borrowers who are purchasing a home and putting down 20 per cent or greater of a down payment and borrowers wanting to refinance their home.

“Clients refinance their home for a variety of options such as to pay off consumer debt (Credit cards, lines of credit, vehicle loans), fund a child’s university studies, home improvements, to pull equity to purchase a rental property etc.

“This stress test will lower the amount the borrower could currently qualify for. Here are two examples:

• “If a buyer is currently qualified to purchases a $600,000 home with a down payment of $120,000, after this rule change takes affect that purchase price would have to be reduced to $500,000.

• “A client wants to refinance their home worth $600,000 and they currently owe $350,000. Under today’s rules, a household income of $90,000 would support a mortgage of approximately $480,000 (depending if the client had other debts not being paid out from the refinance), after the rule change that $90,000 income only qualifies for a $380,000 mortgage, $100,000 less borrowing power for the client.

“These changes are set to take place Jan. 1, but banks may start to implement the changes prior to this date.

“So, if you are considering a home purchase, or a refinance, you should contact your mortgage broker/lender and realtor as soon as possible.

“Please note while the rule changes have been announced by OSFI, none of our partner lenders have explained how this will be rolled out by them so some of the information above may alter slightly.”

Wow! Thank you, Shaun. Those are interesting numbers and facts. What will this do to the real estate market? How will it affect pricing and consumers, with respect to supply and demand?

Certainly, there are many variables. In other provinces, we are already seeing a huge lack of inventory due to a high price variance between their existing home and the next level. That has resulted in many home owners staying where they are and taking their funds to make improvements to their home. People aren’t moving.

The stress test could in fact increase this scenario nationwide, regardless of pricing, as the home owner wanting to make a move in their own market area, may find under the new system them don’t qualify for the next level.

Will this bring down home values. Anything is possible and there are no specific answers.

The market is strong today, with low inventory and buyers actively trying to get into their forever homes or into their first home, before the stress test hits. If you are thinking of buying or selling, let’s talk.

If you have more questions or other topics you need information about, please contact Sharon Black, Re/Max Kelowna at Sharon@SharonBlack.ca or call 250-878-5533.