OSFI Mortgage Stress Test – How Does it Work and How it Affects You and the Current Market
The Toronto Real Estate Market looks very different today from what it did just a year ago. Though GTA sales volumes are steady and prices are growing at a moderate pace, the market just feels slower and there are many Buyers and Sellers who are waiting on the sidelines. Is it a result of the OSFI (Office of the Superintendent of Financial Institutions) Stress Test? The Toronto Real Estate Board is convinced that at a minimum, the stress test provisions and guidelines should be reviewed as this test continues to impact home buyers’ ability to qualify for a mortgage.
It’s important to remember that OSFI introduced these rules to target mortgage underwriting standards and not to address housing affordability. The test was designed to provide a margin of safety such that borrowers were not in debt to their absolute maximum capacity. It’s been noted that the stress test has been successful in reducing the amount of high-risk lending. In other words, today there are fewer highly-indebted borrowers than there were a couple of years ago.
But I’ve got more than 20% for a downpayment – what do you mean I can’t afford it?
In its simplest terms, when a loan officer reviews a loan application, they must consider whether the borrower can afford an interest rate higher than the one that would be extended under the terms of the mortgage. Borrowers who have at least a 20% downpayment (other rules apply for high-ratio mortgages) must be able to afford an interest rate that is the higher of:
- the 5-year benchmark rate; or
- the borrower’s approved rate plus 2%.
For example, if you apply for a mortgage with a 3.45% interest rate, you need to be able to afford a 5.45% interest rate. Let’s assume you want to purchase a $750,000 home and you have a 20% downpayment. You would have to qualify to be able to pay a monthly mortgage payment of $3,645 compared to your actual mortgage payment of $2,980 – a difference of $665/month. With obligations like car leases, child care and schooling costs, etc, this could represent a significant hurdle for many Canadians to jump. If you can’t afford the higher interest payment, then you must search for a lower priced property.
How it Affects You & The Current Market
The stress test effectively reduces a borrower’s buying power. Whether you are trying to get into the market or wanting to upsize or upgrade your home or location, you may be disappointed. In most cases, people are not qualifying for a mortgage for the type of property they wish to buy. First time home buyers who want a downtown condo can’t break in to the market and move-up buyers often don’t have enough equity in their current homes to “trade-up” under the new rules. And thus we have some buyers waiting it out on the sidelines…and sellers too, since the move-up buyers can’t afford to move and they aren’t putting their current homes up on the market. In fact in March 2019, new listings were down 5.1% compared to last year.
I work with my clients on a variety of comprehensive solutions and strategies to achieve their home ownership objectives. If you’re concerned or curious about how this stress testing affects your personal situation, give me a call! I’d be pleased to discuss!