How to Avoid the New Mortgage “Stress Test”

November 16, 2017

Home buyers in BC and across Canada are bracing themselves for strict new qualification rulescoming into force in January for mortgage applicants who have more than 20% as a down payment.

Those buyers will have to undergo the same “stress test” that was introduced a year ago for buyers who have less than 20% down.

The stress test will now require all new applicants for mortgages at federally regulated financial institutions – such as banks and monoline lenders – to income-qualify at the Bank of Canada posted interest rate, which tends to be notably higher than the rate mortgage-holders will actually pay.

The new policy 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.

The move was put in place by the Office of the Superintendent of Financial Institutions (OSFI), which is the federal agency in charge of maintaining the stability of the Canadian banking system, and is intended to prevent consumers taking on too much mortgage debt.

However, some mortgage lenders – including credit unions such as Vancity, Coast Capital and Prospera – do not come under OSFI’s jurisdiction, as they are provincially regulated by the Financial Institutions Commission (FICOM). Credit unions in BC are not required to “stress test” their mortgage applicants in the way banks are.

Therefore, a buyer can get a mortgage with a credit union and income-qualify at the rate they will be paying, which may give them more purchasing power.

When asked by REW whether FICOM BC intends to follow OSFI’s lead in implementing a “stress test,” Frank Chong, acting superintendent of financial institutions at FICOM, confirmed that there were no plans to do so. He issued the following statement to REW:

“FICOM has reviewed the new requirements from the federal bank regulator (OSFI) regarding requirements for residential mortgage qualification. These changes come into effect in January 2018 for federally regulated financial institutions but will not apply to provincially regulated institutions like credit unions now regulated by FICOM. Because some borrowers will not be able to qualify for mortgages with banks, they may migrate to credit unions or private lenders where qualifying is less stringent. FICOM has a residential mortgage guideline in place for credit unions and regularly reviews that directive to determine if credit unions are managing risks effectively. In the coming months, we will be consulting with credit unions and monitoring developments in residential mortgage lending to protect the interests of consumers and credit union members.

“We will continue to assess the situation, but no changes are contemplated in provincial requirements at this time.”

Alisa Aragon, mortgage expert and financial advisor at Bridgestone Financing Pros, confirmed that credit unions do not qualify applicants at the higher rate, but offered a warning to buyers before they rush out to apply for credit union mortgages.

“Credit unions could be an alternative to other lenders if you don’t qualify with the stress test, but in certain cases the rates might be higher at credit unions, or the income ratios might be tighter. While you might qualify at a credit union, our job as mortgage experts is to get the best mortgage with the best rates and terms, whether that is at a credit union, banks, monoline lender or private lender.”