The New Stress Test Could Affect Your Pre-Approval

OSFI Stress TestIf you’re among the roughly 1 in 6 conventional borrowers with the highest debt ratios, OSFI’s new mortgage stress test could keep you from:

  • buying the home you want (which may be a good thing)
  • renewing at better rates with another lender, or
  • refinancing to lower your debt burden.

That’s making hundreds of thousands of borrowers somewhat anxious. It’s why we’re seeing a small jump in mortgage and pre-approval applications as people try to lock in a lender commitment before the rules change.

Tips and Timelines

If you’re getting a pre-approval or closing on a purchase after January 1, 2018, read on. Below are important reminders from the banking regulator, OSFI.

First off, know that if you have a pre-approval in place, “A bank should honour [that] pre-approval,” OSFI says. But the regulator cautions that you need to confirm this with the lender. Some “pre-approvals” are little more than glorified rate holds.

Also, OSFI recommends being aware of all conditions that apply to your pre-approval. At the time your pre-approval becomes a real approval, many lenders will want to make sure your credit, income and debt load haven’t deteriorated since you first applied. In other cases, a lender may do a full approval up to a few years in advance if you request it, subject only to a cursory credit review and an up-to-date appraisal before you close.

If you need a mortgage in the coming months, here are some timelines to be aware of (and this is a direct quote from the regulator):

  • Loan applications in process/signed for ‎borrowers who qualified before October 17, 2017, will not be affected by the new rules, regardless of when the house will be completed/delivered.
  • Loan applications pre-approved for ‎borrowers who qualified before October 17, 2017, should not be affected by the new rules, regardless of when the house will be completed/delivered (the borrower should confirm this with the institution as B-20 does not address “pre-approval”).
  • Loan applications or pre-approval occurring between October 17, 2017, and January 1, 2018, might be subject to the new rules, depending on the institution. This is because, as mentioned in the annex to the cover letter that accompanied the final Guideline B-20, where possible, institutions are encouraged to comply with the new rules as soon as they can.
  • Loan applications or pre-approval occurring after January 1, 2018, will be subject to the new rules.

That last point is key if you’ve bought a home that’s not closing until 2018 or later. If you apply for financing after the rules kick in, your purchase contract date doesn’t matter. The new rules will apply. No doubt, this will be an unpleasant surprise for a small minority of new-build buyers trying to get a bank mortgage near closing.