Solving or Escaping the New Uninsured Stress Test

Many Canadians have been affected by the recent shift in the real estate market as efforts of the Liberal government have driven prices down. With the majority of my clients being in the GTA, I watched first hand as listing prices fell, appraisals came in at lower than expected and people with good credit and income were forced to take higher rates due to the inflexibility of Canada’s A lenders.

 You may be an investor, a first time buyer, or someone looking to take some money out of your home, but everyone has the same questions: How can we get the money we need to close our deal? I’ve been asked about 95 times since the news broke and I thought I’d lay out a few solutions based on popular cases where the new rules have put pressure on consumers.

 The Problem:

The newest in a slew of rules cranked out to help cool the housing market is OSFI’s implementation of a stress test for uninsured mortgages. The change will require uninsured mortgages (those with more than 20% down) to be qualified at a stress test above the contracted rate of the loan. In 2017 you could borrow qualifying at 3.2% for your mortgage if that was the actual rate the lender is offering you. In 2018, you will have to earn enough income to meet the debt servicing requirements as if your rate were 2% above your contract rate or 5.2%! The effect of this extra stress test is that borrowing power is reduced by about 15-18%. To put this into some round figures, if you qualified for a $500,000 loan in 2017, you’d only qualify for $420,000 in 2018.

The Scenarios and Solutions:

I’ve come up with a few broad solutions for folks in different situations to highlight options available to you.

 Bought a pre-construction property

If you bought a pre-construction property and need to close next year, you likely won’t be able to lock in your mortgage before the rules come into effect on Jan 1, 2018.

 Short term: Some folks will inevitably abandon their deals and decide instead to sell their property. If you are able to assign the purchase agreement to someone else that is an option, although many lenders treat these as special cases and wont lend to your buyer on more than the builder’s price. If you have to close the property to sell it at the new market value, you can consider a private mortgage to close the deal and hold it for a short term until the sale and closing.

 Long term: If you want to lock in for a longer term and intend to live in or hold the property, you may be forced to a B lender to allow you to show less income for a higher amount of loan. These lenders also often allow secondary financing to get you all the funds you need even if they won’t provide them all. Rates at B lenders are usually only 1-2% higher than AAA lenders and they offer much more flexibility in their lending practices.

 Buying a resale property

If you are buying a resale property and can lock in your mortgage before the Jan 1 2018 deadline, you should likely be able to skirt the new stress test but look out for lenders to require compliance before the actual rule comes into place.

 Longer Amortization

If you cannot lock in before the rules change, you may be able to qualify for more funds if you amortize your loan for a longer period. As of now a few lenders still offer 35 year amortizations which effectively

 Pre-approvals

TD is one lender that has said that they will honour pre-approvals for 120 days from the time of application into the new year. This can make an impact for those folks looking to borrow larger amounts than they would qualify for under the new rules.

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