Changes to Mortgage Rules – New stress tests mean higher renewal rates
New mortgage stress tests which come into effect January 1st make it more difficult for Canadians to qualify for a mortgage. Also, mortgage rates are expected to rise. The combined two factors are likely to result in Canadians being offered less competitive rates at renewal. It won’t be intentional but it will be the natural result of less competition. To clearly explain the issue, we will quickly walk through “Jenny’s” renewal process.
- Jenny is organized and has a reminder on her Google Calendar that her mortgage is coming due for renewal in 4 months.
- She contacts a mortgage broker to find out what rates are available because at any point in time one lender may have a promotion.
- After talking to her mortgage broker, she finds out there are some great rates but she can’t transfer her mortgage to another lender because she doesn’t qualify under the new stress tests.
- A month later she receives a cookie-cutter letter from her lender asking her to renew her mortgage but the rate is much higher than what the mortgage broker offered!
- Jenny talks to the branch and tells them she deserves the rate offered by the competition.
- The branch asks her to send them a copy of the approval commitment from another lender at the lower rate so they can match it.
- Jenny can’t get an approval from another lender. She’s stuck.
How likely is this to happen to you?
Rates are rising
A competitive 5-year mortgage rate was close to 2.5% in 2016 and in early 2017 but since then rates have risen by approximately 0.5%. Most forecasts see rates rising another 1% between now and the end of 2019. As you’ll see from the chart below, that is still well within the range of rates available in the past 10 years.
The stress test
The federal regulator has required banks to apply a 2% stress test to all mortgage approval decisions.
This means the government wants the bank to test whether a borrower can handle a 2% increase in mortgage rates. The government believes there is a real risk of rates increasing by 2% so they are protecting Canadians from taking on too much debt while rates are low.
Should I worry?
If you live anywhere outside Greater Toronto and Metro Vancouver the stress test likely won’t impact you. If you live in in a city with expensive real estate then pay attention.
The figure below shows how a household with a gross income of $100,000 will qualify for $161,000 less in 2019 than they did in 2016. That’s a 30% mortgage reduction and most people who have bought a home within the last 5 years won’t have reduced their mortgage by that much.
If you limit your options to the Big 6 Banks you may be stuck renewing with your current financial institution with no option to shop around for a better rate. Even worse, your current financial institution may know you will have to renew with them at whatever rate they offer you.
What can I do?
Some lenders are not regulated federally and are not required to apply the stress test. This includes provincially regulated Credit Unions and private lenders.
There are also federally regulated lenders that have the option to spread mortgage payments over 30 or 35 years which can help you pass the stress test.
Consult a mortgage broker to get access to “no-stress-test” lenders and lenders who offer 35-year mortgages.
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