SO WHAT HAPPENED?
On Tuesday February 18th, the bank of Canada announced a change to the mortgage stress test policy, with changes taking effect April 6th, 2020.
WHAT IS THE EXACT CHANGE?
So essentially, the stress test rate is coming down by 0.3%, and maybe more, depending on where rates go.
SOME REAL NUMBERS IN BUYING POWER INCREASES:
Case 1: Low income, minimal downpayment.
This results in a $6,000 increase in buying power.
Case 2: Median Income, minimal downpayment.
This results in an increased buying power of $17,000.
Case 3: High income, minimal down payment.
So here we have an increased borrowing power of $35,000.
Case 4: 20% down, or refinances.
However, in this case, the debt servicing ratios are so close together, that most likely the lender would make a “debt servicing exception” and both incomes would qualify for the mortgage. More on this below.
THE LOW DOWN
The changes appear to have greater impact as the numbers grow. The largest change in borrowing power was on the higher, more expensive property. This is of course assuming you have enough income to qualify in the first place.
The first three case studies above are for “high ratio” purchases only, with only one case study for 20% or more down. I did this for a reason. When we are working on applications for purchases with less than 20% down, there is ZERO wiggle room when it comes to debt servicing. There are NO EXCEPTIONS. If the debt servicing ratio is more than 39% GDS, it just won’t fly! This isn’t lender policy. This is the insurer’s policy (CMHC, Genworth and Canada Guaranty), who take their marching orders straight from the Bank of Canada. They will decline applications even if the GDS (gross debt service ratio), is at 39.1%, just .1% over the guideline.
When you have 20% or more down, some lenders (not all), are willing to make debt servicing exceptions if they believe the application is strong enough. As a result, this stress test policy change probably has little to no effect on those who are refinancing or putting 20% down. The 0.3% change in the stress test really doesn’t affect debt servicing ratios by a huge amount when we’re dealing with larger downpayments. Of course, as we increase the mortgage amounts required, the stress test can start to make a larger difference in qualification on applications that are “on the cusp” so to say.
I really can’t stress enough, that those people with an “on the cusp” application, will have a much better chance at getting approved if they are working with a qualified mortgage broker (me), who really knows what they’re doing. In many cases, I’m the difference between a decline and an approval. Why? For a number of reasons. They way I structure the deal on submission. My notes and reasons to make the lender feel inclined to approve the deal. If I believe in a deal and want to make it work, I pressure the lender to do whatever they can to get that approval done.
How many clients have come to me after being declined at BMO or RBC, and then getting approved with me? Lots!
Ultimately, I don’t believe a 0.3% difference in the stress test is going to make much of a difference on the applications with 20% or more down. Remember though, I have to stress (no pun intended), that here I’m really talking about “on the cusp” applications. Sometimes even my best lenders will come back to me and tell me there is no chance of something getting approved, for a number of factors.
Generally in these cases, the application wont even make it to the lenders desk, as I always have a verbal conversation with lenders before submitting questionable applications.
IS THERE A LESSON?
Of course, and you’ve heard it from me before. As I always say, don’t try to calculate out yours or your client’s debt servicing ratio, or if you will qualify or not. There are too many factors to consider and you’ll just end up with an incorrect assumption. That’s my job!
Will There Be an Impact on the Real Estate Market?
Yes and no. The stress test is an attempt by our government to make it easier for some people to get in the market. So, that person looking at properties for $515,000 will now be able to look up to $530,000. But if demand increases, prices will probably increase slightly too, so that properties listed at $515,000 will probably get listed for more anyways. When we really look at it, this change could just drive up prices in some places by however much the stress test change increases the general borrowing power. An unintended result.
In my opinion, this policy change is too small for us to be able to accurately measure if it’s going to have any real impact on the real estate market. However combined with other variables, we may see some changes.
Thanks for reading, and of course, your comments are appreciated!