Stress test stalls move-up buyers
April 24, 2018
Realtors and mortgage brokers warn the mortgage stress test that began covering all homebuyers this January is freezing plans of move-up buyers.
The Office of the Superintendent of Financial Institutions mortgage stress test requires that buyers with more than a 20 per cent down payment must qualify for their mortgage at an interest rate 2 per cent higher than the current Bank of Canada five-year mortgage rate of 5.14 per cent, or their current contracted rate, whichever is higher.
The stress test is meant to ensure buyers can afford a mortgage if lending rates should increase. However, over the past 15 years, through fluctuating mortgage rates, Canada’s overall mortgage arrears rate has never risen above 0.35 per cent per cent.
A Mortgage Professionals Canada study estimated the stress test would disqualify about one in five potential homebuyers.
Move-up buyers could be disproportionately affected because they would be most likely to have home equity and qualify for an uninsured mortgage, said BMO Financial Group chief economist Doug Porter.
Faith Wilson, head of Faith Wilson Group, a leading Vancouver residential real estate agency, explained that move-up buyers are finding the mortgage stress test does not allow them to take the next step up the real estate ladder.
She referred to a couple who planned to sell their existing Burnaby house, valued at $1.5 million and buy a larger house priced at $1.9 million. But the mortgage stress test reduced their buying power by 20 per cent, meaning they could only qualify for house worth $1.6 million.
Here is some advice from mortgage specialists for move-up buyers facing the mortgage stress test:
• Buyers need only need to qualify at the higher rate, not actually pay it. The best five-year rate today is 2.99 per cent, so even if the new stress test requires you to qualify at 5.14 per cent, you would be paying the contracted rate of 2.99 per cent on the mortgage once you qualify for the loan.
• Use the existing equity in the home to eliminate smaller debts, such as credit cards and car loans, to make your mortgage application more acceptable.
• Consider taking the maximum-allowed 30-year amortization on a non-insured mortgage, which will reduce your monthly payments compared with the conventional 25-year amortization.
• Consider getting the mortgage through a credit union, which is not subject to the federal mortgage stress test and may be more welcoming to your application.