Are You Stressing Over The Stress Test?

ARE YOU STRESSING OVER THE STRESS TEST?
New Mortgage rules courtesy of Sandra Gentles at the Mortgage Group

The Office of the Superintendent of Financial Institutions (OSFI) has announced a whole new set of B20 mortgage qualifying rules, set to come into effect on January 1, 2018. Below is a summary of what we can expect going forward…

1) As of January 1, 2018, the customer will have to qualify at the greater of either two; the contract rate +
2%, OR the Bank of Canada Benchmark Rate (currently 4.99% – but subject to change at any time).
2) High ratio mortgages, greater than 80% loan-to-value will still be qualified at the greater of the contract
rate OR the Bank of Canada Benchmark Rate (the 2% is not added).
3) Legally binding (firm) Purchase and Sale contracts dated prior to January 1, 2018 will qualify under the
current rules (regardless of the close date).
4) Legally binding (firm) Purchase and Sale contracts dated after January 1, 2018, the borrower must
qualify under the new rules (rule 1 & 2 above).
5) Refinances approved prior to January 1, 2018 must close within 120 days of application date to qualify
under current rules.
6) Pre-approvals that have not been converted to live deals before January 1, 2018 will be subject to the
new rules.

How does this new rule affect home buyers?

Here is an example:

Under the current rules, prior to January 1, 2018, client can qualify at their contract rate (for this example I will use 3.39% as the contract rate) with 20% or more down payment:
$700,000 – purchase price
$140,000 – 20% down payment
$560,000 mortgage – 80% loan-to-value
3.39%, 5 year term, 25 year amortization
$110,000 annual income to qualify
GDS (gross debt service ratio) = 36.88%

The same income and purchase price under the new rules as of January 1, 2018:
Clients must qualify at the greater of the benchmark 4.99% or contract+2%

If contract rate is 3.39% then (3.39% + 2% = 5.39%) so 5.39% is the rate they must qualify at because it
is greater than the benchmark rate.

Example above redone using contract rate+2% = 5.39%:

700,000 – purchase price
$250,000 – down payment – client requires more down to qualify for this purchase
$450,000 – mortgage – 64% loan-to-value – the client now qualifies for $110,000 less
3.39%, 5 year term, 25 year amortization, qualified at 5.39%
$110,000 – annual income to qualify

GDS (gross debt service ratio) = 36.39%

The client originally qualified for a $560,000 mortgage under the current rules; under the new rules, the
client will qualify for a $450,000 mortgage, in other words $110,000 less.

Based on the above scenarios under the current rules, they qualify at 80% loan-to-value; under the new
rules, they will qualify at 64% loan-to-value, that is a difference of 16%. The client currently has 16% more
borrowing power than they will have once the new mortgage qualification rules come into effect.

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