New Rules Affect Mortgage Renewal

Are you one of over 1 million Canadians who will renew your mortgage in 2018? If so, you have reason for concern.

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Few People Are Aware of the Stress Test

As of January 1, 2018 the Stress Test has been introduced and must be implemented for all new mortgage approvals. Interestingly, it’s stunning how many people know little or nothing about the stress test. More often than not, when the phrase “stress test” is mentioned, the reaction is, “what’s that?” As of January 1st, anyone applying for a mortgage would have to undergo the stress test in the following manner.

Example of the Stress Test:

  • You might be looking at a contract interest rate of about 3% today;
  • At 3%, let’s say you will qualify for the mortgage you want.
  • To be approved, however, you must be stress-tested at the current qualifying rate of 5.14% or your contract rate of 3% plus 2% whichever is greater.
  • In this instance you would have to qualify at 5.14%.
  • The stress test might cause you to fail and so your mortgage application would be denied.

Renewals Don’t Have to be Stress-Tested, But...

You do not have to be stress-tested if you are renewing your mortgage with your current lender if that mortgagee is federally regulated by The Office of the Superintendent of Financial Institutions (OSFI).

...Transferring Requires a Stress Test

For a number of reasons, but mostly because of negotiating a better rate, you may want to transfer your mortgage to a different lender and, if that lender is federally regulated, you must undergo the stress test; that is, qualify at the greater of the qualifying rate or the contract rate plus 2% as mentioned. If you were to fail the stress test, you would be forced to stay with your current lender. Will Dunning, Chief Economist for Mortgage Professionals of Canada, says that this could put you “in a disadvantageous situation for negotiating” a new interest rate. Dunning estimates that “as many as 200,000 Canadians who renew mortgages will fail the stress test, and this may limit their ability to negotiate the lowest possible interest rates.”

Lenders Not Required To Stress Test Are Encouraged To Do So

Provincially regulated lenders, such as Credit Unions, are not required to perform stress tests. They are, nevertheless, encouraged to do so.

In a recent application a senior wanted to borrow an additional $25,000 against her home, valued at $300,000, to purchase a new car. This would increase her registered line of credit from $50,000 to $75,000. She has no other debts and an excellent credit rating of 790. On her income, however, she failed the stress applied by her bank. She then went to a Credit Union who also stress-tested her. A debt of $75,000 against a $300,000 home gives her a very low loan-to-value ratio of 25%. Yet the mortgage was denied. There has got to be something wrong with this.