New mortgage stress test rules are coming June 1

The country’s federal banking regulator is tightening rules on mortgage stress tests for homebuyers with uninsured mortgages starting June 1.

The minimum qualifying rate for uninsured mortgages – residential mortgages with a down payment of 20 per cent or more – will rise to either the contracted rate plus two percentage points or 5.25 per cent, whichever is higher.

As it stands, any buyer whose down payment on a home is one-fifth of the purchase price or more has to show they can afford mortgage payments if the interest rate was two percentage points higher than what the bank is offering them or the five-year benchmark rate published by the Bank of Canada, which sits at 4.79 per cent — whichever is higher.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed the changes in a release Thursday after it reviewed submissions on the plan that it first proposed in April.

“The rate in place as of June 1, 2021 will help support financial resilience should economic circumstances change, while our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system,” Ben Gully, OSFI assistant superintendent of regulation, said in a release.

“In a complicated and sometimes volatile housing market, the need for sound mortgage underwriting cannot be underestimated.”

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The tougher stress test will make it more difficult to qualify for a mortgage in the short-term, according to James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage.

“At all income levels, this change reduces the amount of mortgage a household can qualify for by about five per cent,” he said in a statement.

After OSFI’s announcement, Deputy Prime Minister and Finance Minister Chrystia Freeland said in a statement the new rules will also apply to insured mortgages – mortgages with a down payment of less than 20 per cent.

“The federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages, subject to review and periodic adjustment, which will be the greater of the borrower’s mortgage contract rate plus 2 per cent, or 5.25 per cent,” she said.

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“It is vitally important that homeownership remain within reach for Canadians. We know that we need to take energetic action on housing supply and affordability in Canada.”

Laird says Canadians currently looking to buy a home should ensure they secure their mortgage pre-approval prior to June 1 as OSFI will allow lenders, at their discretion, to grandfather the current stress test rate.

The same goes for anyone who has already purchased a home and anyone looking to refinance.

OSFI also said Thursday that it would review and communicate the qualifying rate at least once a year — every December — well ahead of the spring selling season.