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Canada’s new mortgage stress test will require borrowers to prove they can make their mortgage payments at an interest rate of 5.25 per cent, up from 4.79 per cent.

Graeme Roy/The Canadian Press

Home buyers will see their purchasing power shrink slightly under Canada’s new mortgage stress test, but experts caution the stricter rule will have little effect on runaway home prices.

The Office of the Superintendent of Financial Institutions (OSFI) plan for uninsured mortgages, announced Thursday, would effectively require borrowers to prove they can make their mortgage payments at an interest rate of 5.25 per cent, up from 4.79 per cent.

Bank regulator restarts consultations on overhauling mortgage stress test after pandemic interruption

The bank regulator believes the proposed change would reduce the maximum mortgage a borrower could take on by 2 per cent to 4 per cent, if the loan’s amortization period remains the same. The change applies to borrowers who aren’t required to buy mortgage insurance because they have a down payment of 20 per cent or more of the purchase price.

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For example, a Bank of Montreal calculation estimates that the new stress test would shrink a $1-million mortgage approval to $955,000.

“The immediate effect is you qualify for less,” said James Laird, president with CanWise Financial mortgage brokerage. Like other real estate experts, he predicts a surge in borrowing and buying before the plan is scheduled to take effect June 1.

Share of new mortgages with a loan-to-

income ratio greater than 450 per cent

Quarterly data

Total mortgages

High-ratio mortgages

Low-ratio mortgages

25%

Start of global pandemic

20

15

Mortgage insurance rules tightened

10

5

Guideline B-20 revised

0

2014

2015

2016

2017

2018

2019

2020

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Share of new mortgages with a loan-to-

income ratio greater than 450 per cent

Quarterly data

Total mortgages

High-ratio mortgages

Low-ratio mortgages

25%

Start of global pandemic

20

15

Mortgage insurance rules tightened

10

5

Guideline B-20 revised

0

2014

2015

2016

2017

2018

2019

2020

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Share of new mortgages with a loan-to-income ratio

greater than 450 per cent

Quarterly data

Total mortgages

High-ratio mortgages

Low-ratio mortgages

25%

Guideline B-20 revised

Start of global pandemic

20

15

Mortgage insurance rules tightened

10

5

0

2014

2015

2016

2017

2018

2019

2020

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

The reduction in loan size would mostly affect first-time home buyers who are already struggling to buy in expensive regions such as Toronto and Vancouver. Even so, some real estate experts say the rule change probably won’t have a huge impact.

“The effects to the borrowers will be negligible,” said Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global. “Buyers will still be able to qualify for mortgages at the same amounts as before by adding a co-signor or pursuing alternative lender options,” she said.

Since the COVID-19 pandemic started, home sales and prices have been setting records across the country. Now, with an acute shortage of properties for sale and strong demand for bigger houses, economists don’t expect OSFI’s proposal to slow the market down.

“Any softening should prove temporary, and this policy is unlikely to significantly alter market psychology or cause a steep or protracted drop in activity,” said Rishi Sondhi, economist with Toronto Dominion Bank .

Even though borrowers will have to qualify for a bank mortgage at a slightly higher interest rate, the actual interest rates they are paying on loans remain low. Five-year fixed mortgages are below 2 per cent, which makes it easier for borrowers to service their debt.

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“Actual borrowing rates that consumers see are not moving, therefore the tone and psychology of the market might not change all that much,” said Douglas Porter, chief economist with BMO .

What the stress test change actually means for you as a mortgage shopper

Matrix Mortgage’s Ms. Martin agreed and said the impact on the market “will be a drop in the bucket compared to the overwhelming demand by eager first-time buyers” and those upgrading to bigger properties.

The last time policy makers moved to cool the housing market was during the boom years of 2016 and 2017. At that time, other changes also contributed to the ensuing real estate slowdown. They included new foreign buyers’ taxes in B.C. and Ontario, and rising interest rates. Ottawa also introduced the mortgage stress test, which raised the qualifying rate borrowers had to meet by at least 200 basis points. OSFI’s current proposal only raises that threshold by another 46 basis points.

Regardless, the bank regulator is the first policy maker to take concrete action to slow the housing market. OSFI said the stricter rule was a pro-active measure to ensure banks would continue to remain resilient amid overheated housing markets.

On Friday, Bank of Canada staff released a special report that said vulnerabilities in the housing market have increased in recent months. The staff report, which is independent from the central bank’s governing council, found that the share of highly indebted households taking out mortgages has risen substantially.

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