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“Stress Test” for All Mortgages to Launch in New Year

Mortgage professionals react as federal finance agency confirms strict new qualification rule
By Joannah Connolly 2017-10-18

All mortgage applicants will have to pass a “stress test” on their qualifying income – no matter how high their down payment – from January 1, the Office of the Superintendent of Financial Institutions (OFSI) confirmed October 17.

The stress test was introduced last fall to all applicants of insured mortgages (those with less than 20% down), but has now been extended to all mortgage applicants including uninsured borrowers, as that group comprises a larger segment of the mortgage market. The test requires an applicant’s income to qualify them for mortgage repayments at the Bank of Canada’s five-year posted rate – higher than the discounted rate they would pay in reality, and currently 4.89% – to create a buffer against future rate rises and any financial difficulties.

The move is said by mortgage professionals to reduce Canadians’ home-purchasing power by around 20% as the higher interest rate will reduce the maximum mortgage that buyers will be able to borrow.

Mortgage professionals widely criticized the new policy as making it harder for buyers to enter an already challenging market, but opinions seem to differ widely on the reasons behind the new policy.

Michael Lloyd, team leader for Dominion Lending Centres (DLC) Canadian Mortgage Experts, told Mortgage Broker News that he thinks the feds’ true aim is to lower high housing prices in Vancouver and Toronto.

“It certainly seems that way,” Lloyd told Mortgage Broker News. “They don’t have any room to raise rates, so it seems like the only other options they can do is make it tougher for people to qualify for mortgages.”

However, Lloyd’s DLC colleague Dustan Woodhouse, a mortgage broker and coach for Dominion Lending Centres, disagrees with this assessment. When asked whether cooling hot housing markets was one of OFSI’s goals, he told, “I don’t think that’s the case, nor do I think that’s the premise [for this policy]. I spent some time in Ottawa talking to senior government members about why. Why, why, why? And OSFI’s mandate is the stability of the Canadian banking system. Period, full stop. They are not worried about the consumer, they are not worried about condo prices in Vancouver. They are looking at the banking system, and finding cause for concern in the stats on household debt numbers (which I think you really have to look hard to find cause for concern in those numbers), but they feel these steps are worth taking to preserve the stability of the banking system.”

Woodhouse added, “This [stress test] will mean a reduction in the amount of mortgage money available to a buyer of about 20%. So if you’re looking at $500K homes, you’re being told, well sorry, now you’re looking at $400,000. That’s a very significant drop... And in this next round of changes… this is for someone with a large down payment, impeccable credit, clearly documented income… And we’re saying all this in the face of rising home prices. So it seems odd that the government is handicapping Canadians in the way that they are.”

Public policy think tank the Fraser Institute last week released a report stating that the new rules will do “more harm than good” and are “unnecessary” for the Canadian banking system.

Joannah Connolly
Joannah Connolly is editorial director of Glacier Real Estate, Glacier Media's real estate division. Joannah writes and curates real estate news for Glacier Media's local newspaper websites, including the Vancouver Courier, North Shore News, Burnaby Now, Tri-City News and others. She also oversees editorial content in Real Estate Weekly Homes, West Coast Condo, Western Investor and Glacier's special real estate publications. A dual Canadian-British citizen, Joannah has 22 years of journalism and editing experience in Vancouver and London, with a background in construction, architecture, healthcare and business media. Joannah has appeared on major local TV outlets as a real estate commentator, has moderated and spoken on various industry panels, and spent two years hosting the Real Estate Therapist radio show on Roundhouse Radio.