Have you been thinking about the stress test and what it means for buyers?
On January 1st, 2018, OSFI implemented new conventional (uninsured) mortgage rules, attempting to protect homebuyers from mortgage default in a rising interest rate environment.
The government introduced a rate cushion which will affect all uninsured mortgages (those with a down payment of 20% and all refinances).
Hanley Mortgage Group Explains:
They must now qualify at the greater of:
The Bank of Canada posted rate (4.99%)
Their contract rate + 2%
This means, if your rate is 3.39%, you would be qualifying at 5.39%
Chris Kapches, CEO of Chestnut Park Park, explains in his latest Market Watch video:
Hanley Mortgage Group outlines some other notes:
If a legally binding Purchase and Sale Agreement is dated/signed prior to January 1, 2018, the customer can qualify under the old rules.
If the legally binding Purchase and Sale Agreement is dated/signed on or after January 1, 2018, the customer must qualify under the new rules.
Some examples are included on the next page to give you an idea of how this implementation will affect buyers.
Bank Of Canada Rate Increase:
On January 17th, 2018, the Bank of Canada increased its overnight lending rate to 1.25% from 1%.
The major 6 banks have followed their lead, and increased their prime rate. Each lender decides what their prime rate will be.
For example: Scotiabank’s Prime Rate is now 3.45%, RBC as well, up from 3.20%. TD has a prime rate of 3.60%, up from 3.45%.
Changes in Prime influence variable interest rates.
For example, If you have a variable rate of Prime – 0.50% with Scotiabank:
Before the stress test: 2.70%
After the stress test: 2.95%
Increase of .25%
Insured mortgages are only available for properties under 1 Million:
They are insured by one of the three insurers in Canada, and are for purchases with a down payment of less than 20%
The minimum down payment is 5% on the first $500,000 and 10% on the difference up to $999,999.
For example: If you are purchasing for $800,000, the minimum down payment would be $55,000 ($25,000 on $500,000 and $30,000 on the other $300,000)
Those looking for an insured mortgage will be qualified at the Bank of Canada posted rate of 4.99% or their contract rate, whichever is higher.
Example: This means, even if your contract rate is 3.14%, you still have to be able to qualify for a mortgage with a rate of 4.99%.
This may price many first-time buyers out of the market, whose only hope of homeownership in Toronto is/was through insured mortgages.
If you have any questions about the Stress Test, you can contact Hanley Mortgage Group for more information.
Source: Chestnut Park Blog