The New Stress Test: Still Scratching Our Heads

Canada’s banking overlord, OSFI, is proposing a new 2-percentage-point (200-bps) “stress test” for people getting uninsured mortgages.

Unlike the current stress test, which is based on one rate (the Bank of Canada posted 5-year, currently 4.64%), this new one is a frequently moving target. At 200 bps above the borrower’s contract rate, it would fluctuate significantly based on the lender and term selected.

This example shows the maximum theoretical mortgage for someone making $70,000, given OSFI’s proposed guideline:

(These numbers are based on today’s lowest uninsured rates, a borrower with no other debts, 1% of the mortgage amount for property taxes, $125/month for heat, a 39% gross debt service ratio, no condo fees and a 30-year amortization.)

The before and after is even more stark. Take a 5-year fixed, for example. Today you can qualify for over $455,000 using the above assumptions. OSFI’s new guideline would chop this down by 18+%, meaning your max. mortgage would be $85,000 less.

The takeaway

About 48% of the Big 6 banks’ mortgages are uninsured, according to BMO Capital Markets. That number is growing at 14% year-over-year, way faster than the insured mortgage business.

If OSFI’s B-20 guideline comes into force as proposed, it’ll be harder for uninsured borrowers to get approved for a “safer” five-year fixed rate than a “riskier” variable rate. That’s the exact opposite of regulators’ stance today.

Word on the street is that OSFI approached certain lenders before releasing these guidelines. It was supposedly trying to gauge lender feedback. So this change in policy does not seem like an oversight.

If this new stress test does take effect this fall, people with higher debt loads will gravitate to riskier terms (from a payment-risk standpoint). And it’ll make those with higher debt loads try even harder to get a lower rate. This could be one heck of a circus.


Sidebar: If you have a thought on these new rules, OSFI is accepting public comments here until August 17, 2017.

 


1 Comment

  • Bill R says:

    Judging by some of the calculations I’ve read concerning these changes, it seems like the overall result is that they will greatly reduce the purchasing power for a large segment of buyers (and not just the least qualified).

    I know it’s said every time new mortgage rules are announced, but it’s hard to imagine that this won’t be the metaphoric straw that breaks the camel’s back–or should I say housing market bull’s back. Of course only time will tell what kind of market effects these new guidelines will have. Though it seems that until the powers that be see a real tangible drop in prices, there’s really no end in sight to additional restrictions that may be in the pipeline.

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