We have seen the Bank of Canada raise the interest rate twice this year, in July and September, but the lawmakers are preparing the housing market for potential further increases by introducing new mortgage stress tests as of 1 January 2018. Getting approved for a mortgage will be definitely harder in 2018 than now, and even if it doesn't affect the actual mortgage costs, it will affect the housing market by limiting the purchasing power of borrowers. 

In order to prepare future borrowers for a possible interest rate increase, the Office of the Superintendent of Financial Institutions will introduce new mortgage stress tests in less than two months. Even uninsured buyers won’t be able to count on their huge 20% + down payment, anymore as they’ll also be subject to the stress tests just like insured buyers. The new mortgage measure is also yet another attempt to slow down the market, in addition to the 15% foreign tax and two interest rate hikes that have been introduced earlier this year.

The stress tests for insured mortgage borrowers adopted last year made many first-time homebuyers creative in coming up with a 20% down payment to avoid stress tests. Still, not everyone had a rich parent or another source to pay the 20% cash, so the majority of buyers was still subject to the stress test. The result? 5% - 10% fewer buyers in the market. Not being able to get through the stress tests means not getting the mortgage. The latest stress tests are expected to produce similar results, where a research by the Mortgage Professionals Canada showed that every fifth prospective buyer would be disqualified.

What Does The New Stress Test Require?
The stress tests will require all buyers to qualify at the benchmark interest rate of the Bank of Canada which is 4.89% when applying for a mortgage. The other option is to test mortgage applicants against a 2% higher rate than their actual one. Buyers can’t even pick between the two, as whichever rate turns to be higher, will be used. Your actual rate can be 3% or 2.8%; you will still be required to prove that you can pay 2% more.  To put it simply, mortgage applicants won’t be eligible anymore to qualify for the same mortgage amount with the same income. In fact, they’ll get 20% less in mortgage money than now unless they come up with 20% extra income.

How it Will Affect The Market?
2018 is expected to start with fewer buyers who probably will first observe how the market works under the new conditions. Second, they also won’t be able to borrow as much as now, so they’ll probably try to come up with a plan to qualify for the desired amount. Move-up buyers might be hit the hardest since they are the largest group of buyers who can pay the 20% + down payment. In 2018, it will be of little use as a huge down payment won’t be part of the eligibility criteria anymore. Nevertheless, we still haven’t reached the end of the year and the December holiday season could actually witness an increased number of buyers trying to use their last chance to get pre-qualified under the existing regulations. As for 2018, private lenders could be a valid option given that they are not subject to the new stress tests.

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