As Victorians rush to secure over a half billion dollars in residential real-estate on the eve of the federal government’s introduction of a universal mortgage stress test, Citified has created this info-sheet outlining pertinent information home owners and real-estate professionals should be aware of.

 

In 2016 the federal government mandated that home purchasers applying for a Canada Mortgage and Housing Corporation-insured mortgage – commonly known as a high-ratio mortgage with a down payment below 20% of the value of the home – would be required to secure that mortgage as though the interest rate was two percentage points higher than their bank’s posted rate or at the five-year average federal posted rate (whichever is higher). In other words, a purchaser attempting to secure a $350,000 mortgage with a 2.95% mortgage rate would be financially ‘stress tested’ at a mortgage interest rate of 4.95% (or higher if the five-year average posted rate eclipses 2%).

 

For example, when applying for a $350,000 mortgage, the difference between the monthly mortgage payment at the bank’s rate of 2.95% and the stress test rate of 4.95% would be $379 per month, enough to force a home purchaser to pursue a less expensive home if their debt servicing limit was breached, or line up a larger down payment.

 

On January 1st, 2018 the federal government will force Canada’s federally regulated financial institutions, namely chartered or 'big' banks, to stress test all of their would-be mortgage clients, their existing mortgage clients looking to refinance their mortgage, or home owners switching from a lending institution (federally regulated or not) to a different chartered bank.

 

The effect of the stress test could force as many as 50,000 would-be home purchasers in Canada to forgo home ownership altogether, the CBC reports, while regions such as Victoria (where the average cost of a single-family home is approaching $1 million) could see a disproportionately higher ratio of buyers being pushed out of the real-estate market.

 

No. The federal regulation only governs so-called chartered banks or 'big' banks, meaning credit unions and independent mortgage lenders are not required to stress test their applicants.

 

Credit unions, however, are expected to voluntarily apply stress tests within several months into 2018, although the actual date by which those institutions could choose to apply the stress test will vary.

 

If you’re approved for a mortgage of $350,000 today, provided your down payment remains the same and your financial situation remains the same in January, the mortgage you’ll qualify for could be reduced by as much as 20% and down to $280,000. This means your down payment will have to increase significantly in order to maintain the same purchasing power.

 

Yes. Consider a higher down payment when applying for a mortgage or seek out a lender such as a credit union or a private lender. Credit unions will have the option of applying the stress test come January 1st and it is expected that many will refrain from doing so for an extended period. Private lenders are not bound by the federal government’s stress test.

 

It is difficult to say how the stress test will impact Victoria’s real-estate market. Many purchasers will opt to pursue mortgages with a higher down payment, while others will shift their home purchasing plans in favour of less expensive properties or condominiums in lieu of traditional single-family dwellings.

 

Although real-estate prices could recede due to a reduction in overall purchasing activity, Victoria’s record-low re-sale housing inventory is expected to remain unchanged over the medium term and could, in fact, buoy prices to keep pace with inflation or maintain a similar price trajectory to that of 2017. C