A few weeks ago, I posted a short article which outlined word of proposed changes to Canada’s mortgage stress-test. In short, our financial sector is beginning to take steps towards shoring up our market against potential hikes in interest rates over the medium term. This is particularly crucial now, as we’re in the midst of a very hot market fuelled in part by historically low interest rates, and everyone has a stake in avoids a situation where foreclosures due to rising rates become commonplace.
It’s unfortunate that the short-term effects of a stricter stress-test will restrict purchasing power for first-time buyers – especially in what’s already a very competitive market – but long-term stability will be to the benefit of everyone. Today I wanted to share a rather more detailed update that our office recently received care of our friends at TD Bank. This analysis gets into a little more detail in terms of the specific impacts of the proposed changes to the existing stress-test and is a touch more numbers-heavy than what I typically post in these pages. So, if you’re interested in learning more about exactly what this could mean for your own situation (particularly if you’re newly in the market for a home or are considering a move in the near future), I’d encourage you to reach out today for more personalized advice.
So, without further ado, here’s a look at the update from TD:
“The Office of the Superintendent of Financial Institutions (OSFI) recently proposed a change to uninsured qualifying rate rules. Upon confirmation, effective June 1, 2021, OSFI will require uninsured mortgages, including TD Home Equity FlexLine borrowers, to qualify at the greater of:
- the OSFI-defined five-year minimum qualifying rate (5.25%) or
- the customer’s contract rate + 2%.
Example: If the customer’s rate is 2.29% + 2%, their qualifying rate would be 4.29%, however they would be qualified at the 5.25% OSFI rate which is the greater of the two.
Further updates to OSFI’s proposed qualifying rate rules, if any, will be communicated as they become available.
What you need to know
- The impact to the customer of this change is estimated to be up to a 4% reduction in the principal amount, depending on the customer’s circumstances.
- Existing pre-approvals must have a Purchase and Sale Agreement (PSA) signed before June 1, 2021 in order to not have to requalify under the new rate rules.
- A signed PSA means the offer has been accepted prior to June 1, 2021. There may still be conditions to be waived or fulfilled.
- For refinances, any new submissions or resubmissions with material changes received on or after June 1, 2021 will be qualified under the new qualifying rate rules.
Here’s an example of how the new qualifying rate rules can impact the maximum mortgage amount a customer can qualify to borrow. The below amounts are based on a combined household income of $100,000, a five-year fixed-term mortgage rate of 2.29%, a 25-year amortization, a down payment of $100,000 and $700 in other monthly debt obligations:
- Up to May 31, 2021 vs. After June 1, 2021:
- Target rate remains the same from 2.29% to 2.29%
- Qualifying rate from 4.79% up to 5.25%
- Maximum mortgage down from $403,000 to $385,959
- Available down payment remains the same: $100,000 to $100,000
- Home purchase price down from $503,000 to $ 485,959
In this example, the customer experienced a 4% decline in the total mortgage amount they qualify to borrow. A customer’s maximum mortgage amount may be influenced by several factors including the term selected, variable or fixed rate, product selected, amortization, other debt obligations and credit score. Note: this example is for illustrative purposes only.”
