17 October 2017

Those who provide more than 20% don’t need this insurance, and they are called uninsured borrowers. This is the category of buyers, which is affected by the new rules.

The stress test is used to make sure a borrower will withstand a potential rate increase and keep paying off the loan. It simulates a borrower’s financial situation when they have to pay at an average posted rate, and not at their contract rate. It means that borrowers will be stress tested at either the five-year average posted rate (now it’s 4.89%), or at a rate 2% higher than their contract one – depends on which one is higher.

In the same time, the new stress test rules will not affect mortgage renewals if they are with the borrower’s existing bank.

OSFI released its draft version of changes this summer before asking stakeholders about any necessary edits. The regulator received more than 200 comments from industry specialists and members of the public on those rules.

The opponents, including many from the housing industry, believe that applying the stress test to all borrowers could freeze the market, and now it’s not ready for it. Nevertheless, OSFI went on with the changes calling them “vigilant.”

“Such rules strengthen a necessary regulatory regime for residential mortgage underwriting in Canada,” – noted Jeremy Rudin, OSFI’s superintendent.

TD Bank economist Brian DePratto shares the idea, saying those changes may help the Canadian banking system remain strong amid rising rates.

However, there will be also a negative side. DePratto says applying the test for all borrowers will reduce the market demand by 5%-10%, and we may see a period of rushing before the rules take effect next year.

In his opinion, the way the market reacted to the previous stress test implementation is a great reason why OSFI decided to keep acting: in August, the number of insured mortgages fell by 4.5% during the 12 months since the stress test existed.

Meanwhile, the number of uninsured mortgages rose by 17.3%. It means borrowers did everything to exceed the necessary 20% and avoid additional tests.

“The uninsured market shows about 80% of activity now, and this number will bite, probably, even harder than during the previous changes in the most expensive markets,” – Bank of Montreal economist Doug Porter noted.

In other words, a potential buyer of a $1 million property who provides a 20% down payment will face a purchasing power decline by almost 15%.

“These rules reflect a further tightening of the housing market conditions.”

Moreover, the new rules require from lenders to show higher scrutiny on the loan-to-value ratio check, so that they wouldn’t give larger mortgages than the real value of the home.

Another change concerns new limitations on bundled mortgages, aimed at making sure the banks don’t lend more than they are allowed.