New Mortgage Stress Tests – How lenders are handling "in-flight" deals
The new mortgage stress tests which come into effect January 1 make it more difficult for Canadians to qualify for a mortgage. But what if you’ve already bought a home and it closes after the new rules come into effect? The federal regulator didn’t provide lenders with specific guidance on how to handle home buyers who bought a pre-construction home that completes in 2018, or simply bought an existing home that closes after January 1.
We’ve looked at 5 major lenders and found that each one is handling the new rules differently.
Purchases
A few lenders will apply the old rules for any purchase signed before January 1, but most have complicated conditions for the approval of the mortgage and for the closing date.
Approval Deadlines
December 15 or 30? In order to avoid the stress test, some lenders require that your mortgage be approved by December 15, while others will apply the old rules until December 31. Then there are lenders who don’t have an approval deadline at all - as long as the purchase agreement was signed before 2018.
Closing Deadlines
90, 120, and 180 days? Yes, you must take possession soon or the “stress-test-free” approval will expire. Some lenders start the clock at the date of mortgage approval and others start the clock on January 1. Still others don’t have a stopwatch at all, so long as the purchase agreement was signed before 2018.
No Changes Allowed after 2017
In the new year, some lenders will make you re-apply using the stress tests for your mortgage if you ask to modify the property address, ask for a different amount, or change the duration of the loan.
Transfers & Refinances
If you were approved for a mortgage transfer or refinance in 2017 that funds in 2018, then you also need to beware.
Funding Deadlines
Most lenders seem to be applying the new rules to all their mortgage transfers and refinances funding in 2018. Others are grandfathering the old rules as long as the loan funds within 120 days of the date of the approval - some even allow 180 days
Remember, you aren’t allowed to make any changes to your mortgage after Dec 31.
How does this impact you?
Every lender is handling the changes differently. It’s a shame the regulator didn’t anticipate these issues and provide lenders a consistent approach to implementing the stress tests, but here we are.
The combination of rising rates and the new stress tests could force homebuyers to come up with significantly higher down payments than they expected.
If you are buying outside Greater Toronto and Metro Vancouver, the stress test likely won’t impact you. But if you live in a city with expensive real estate, then pay attention. The combined impact of higher rates and the stress tests are explained in more detail below.
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 to 3%. 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 over 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 home buyer 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.
How bad is it?
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.
The most impacted home buyers are those who signed a pre-sale contract in 2017 believing they could afford the home based on their savings and pre-approved mortgage. However, under the new rules, they may find themselves short tens of thousands of dollars and unable to take possession of the home.
Tragically, if Canadians limit their lender options they may have to cash in investments, ask for early inheritance, or sell their home to cover the shortfall.
What can you do?
Federally regulated lenders are all handling the transition differently, and provincially regulated lenders 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, instead of the standard 25 years, which lowers your monthly payments and can help you pass the stress test.
To get access to experts who know what every lender is doing, consult a mortgage broker. They have the broadest number of options to find you suitable financing.
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