Why Jan 2018 Mortgage Stress Test Will Have Minimal Effect on Investors

No Need to Panic Because of New Mortgage Rules

Starting January 1st 2018, all Canadians looking for a mortgage will have to undergo a stress test. No matter how much down payment you put in, your lender will apply the stress test criteria to check that you will be able to pay interest even if interest rates were to go up.

Stress test rate is the higher of:

• the rate that you are approved for plus 2%, or 
• current Bank of Canada (BoC) 5-year conventional mortgage rate.

As of Nov. 25th, 5-year BoC rate is 4.99%. 

Fixed Rate Mortgage Qualification Example

Suppose you are applying for a 5-year fixed 3.29% conventional mortgage with 20% down payment.

Currently, the lender verifies that you meet their borrowing criteria at the contract rate of 3.29%. Let's say that based on your income, borrowing, etc., they determine that you qualify for up to $400,000 mortgage. Thus, you can afford a house up to $500,000.

Come January 1st 2018, the lender will check that you meet their borrowing criteria at 5.29% interest rate instead of the contract rate of 3.29%. This is because 3.29 + 2 = 5.29% and 5.29% is higher than the 5-year BoC rate of 4.99%. Based on this test, the maximum mortgage amount you will qualify for will be $328,000. Thus, you will be able to afford a house up to $410,000.

Variable Mortgage / Line of Credit (LOC) Qualification Example

Suppose you are applying for a variable 3.00% interest rate mortgage or a line of credit.

Currently, the lender uses Bank of Canada's 5-year conventional mortgage rate as their qualification rate for such applications. Say, you qualify for a variable mortgage up to $337,000.

Under the new rules, the lender will use 5% as qualification rate because 3.00 + 2 = 5% and 5% is higher than 4.99%.

Given that 4.99% is very close to 5%, you will not notice much difference and will still qualify up to $337,000 variable mortgage.

Qualification Summary Chart

	Current Criteria Down Payment 20% or more	New Criteria Any Down Payment
House Price	$500,000	$500,000
Approved Rate	Fixed: 3.29 VRM: 3.00 (prime - 0.2)	Fixed: 3.29 VRM: 3.00 (prime - 0.2)
Qualification Rate	Fixed: 3.29  VRM: 4.99%	Fixed: 5.29 VRM: 5%
Approved Mortgage	Fixed: $400,000 VRM: $337,000	Fixed: $328,000 VRM: $337,000

Minimal Implications for Investors

At a recent Real Estate MeetUp, a survey of real estate investors showed that most of them did apply and were approved for a line of credit or a variable mortgage in the past 12-18 months. 

This means that the majority of investors already met the more strict qualification criteria, such as 5% test in the example above.

This tells us that for all the investors who have recently qualified for a variable rate mortgage or a line of credit (i.e. most investors), the new stress test will not make a substantial difference.

Useful Tools

Here are some tools you might find useful:

• Mortgage Affordability Calculator
• Bank of Canada 5-year Conventional Mortgage Interest Rate