The OSFI stress test is a tool that is becoming more and more important as more and more borrowers are struggling to make payments during the economic downturn. The OSFI stress test is designed to assess how readily a borrower will be able to repay a loan, based on a number of factors.
As of January 1, 2019, mortgage lenders will no longer be able to originate uninsured mortgages. While this is a good move to protect homeowners and the housing markets, it will have an impact on the market. Mortgages will become more expensive for first-time home buyers and will likely cause the number of fully insured mortgages to shrink over time.
The Canadian Mortgage and Housing Corporation (CMHC) is making some major changes to the insured stress test that lenders will have to comply with in the year 2021. In many ways, the changes are positive, but there are some major drawbacks, and many home buyers are worried that they will be worse off. We look at the changes and what home buyers should do to protect themselves from the changes.
We are currently experiencing an incredibly hot real estate market across Canada. House prices have shot up and home sales have shot up. According to the Canadian Real Estate Association (CREA), home sales in February 2021 were up more than 39% compared to the same month last year. And the average home price in Canada is up 25% from the same period in 2020. These figures have led many to believe that the housing market is currently overheated, and there are concerns that many buyers are biting off more than they can chew. With interest rates so low, buyers are flocking to the market. But with real estate prices so high, they may be too promising. To prevent a rush of foreclosures, the mortgage industry has introduced a mortgage stress test, approving uninsured mortgages at a certain interest rate to ensure buyers can afford to repay the loan even if interest rates rise. Opponents of the stress test say it is too restrictive. Those who agree with the test say it will help bolster mortgage underwriting standards in Canada, given the current booming housing market. And it’s going to get even harder.
OSFI New minimum qualifying rate for uninsured mortgages
In early 2020, OSFI launched a consultation process on the qualifying rate for uninsured mortgages, but this was suspended in March 2020 following the COVID 19 outbreak. He renewed his consultation on the 8th. April 2021, stressing the importance of competent mortgage credit underwriting. Currently, the eligible interest rate is the higher of the contractual mortgage rate plus 2% or the base rate. Currently, the base rate is 4.79%, which means that borrowers should qualify for a home loan at 4.79%. The Office of the Superintendent of Financial Institutions (OSFI) recently announced that it will make some changes to the stress test for uninsured mortgages. The Organization proposes to apply to uninsured mortgages an eligible interest rate equal to the mortgage rate plus 2%, but not less than 5.25%. OSFI also recommends that rates be recalculated at least annually. The new amendments entered into force on 1 January 2009. June 2021 in effect.
What is an uninsured mortgage?
Uninsured mortgages are mortgages with a down payment of at least 20% for which no mortgage insurance is required. Any mortgage with a down payment of less than 20% of the home’s value requires mortgage insurance in addition to principal and interest. This insurance is paid for by the borrower and protects the lender in case of default on the mortgage. Since mortgages with a down payment of at least 20% reduce the total amount borrowed and the loan-to-value ratio, lenders are not as vulnerable. Therefore, these loans do not require default insurance, which means they are not insured.
Reasons for implementing a new minimum qualified interest rate for uninsured mortgages
OSFI’s recent decision to change the stress test for mortgages comes at a time when the COVID-19 pandemic continues to have a negative impact on the national and local economy. Unemployment remains relatively high, while hundreds of thousands of businesses have closed their doors. But while millions of Canadians have ended up on CERB, others are still managing to raise enough money to participate in the housing market. Some of the country’s major real estate markets have historically experienced a steady upward trend. But in the past year, home prices have risen in almost every Canadian housing market, leaving many wondering if the market is overheating. A number of factors have contributed to the rapid rise in house prices since the start of the pandemic. Extremely low interest rates are one of the main factors driving buyers to enter the market, as they make buying a home much more affordable. The travel restrictions have also resulted in many Canadians saving money they would have otherwise spent on vacation. In addition, the rise of telecommuting has led many city dwellers to seek more locations outside metropolitan areas. The influx of buyers has prompted policymakers to ensure that borrowers are not left out in the cold. In the current market situation, lenders and borrowers may be exposed to increased risk. By changing the eligibility criteria for mortgages for the stress test, OSFI is ensuring that foreclosures do not occur.
Impact of new OSFI minimum qualifying rate for uninsured mortgages
The new minimum qualification level for stress tests on uninsured mortgages is likely to have the following effects:
Reduction of risk for creditors
The minimum qualified interest rate means borrowers must meet more stringent qualification criteria to qualify for a mortgage. This allows borrowers to continue their mortgage payments when interest rates rise, reducing the risk to their lenders.
OSFI’s changes to mortgage stress tests will reduce the maximum affordability of mortgages for the average borrower by requiring proof that they can afford a home loan even at higher interest rates. Fewer borrowers will be able to get a mortgage, which means fewer buyers. As a result, the housing market should cool down somewhat.
Inequality between economic classes
Rising qualifying rates will push more middle-class Canadians and first-time homebuyers out of the market. This means the wealth gap could widen, making it harder for Canadians without family support to buy a home.
Changes to OSFI stress test Q&A
Who is OSFI?
The Office of the Superintendent of Financial Institutions (OSFI) is a federal agency created in 1987 to ensure healthy competition among financial institutions and protect policyholders, depositors, creditors, and retirement plan participants.
Who will be affected by OSFI’s proposed tariff?
The changes will affect people applying for an uninsured mortgage.
New changes to the stress test for qualified mortgages make buying a home less affordable, meaning fewer buyers are entering the market. The housing market and property prices could flatten as a result. While some argue that these requirements are too strict, others stress the importance of not borrowing too much money in the name of buying a home.In May of this year, OSFI released new guidance on the stress test for uninsured mortgages (i.e. those mortgages that were not insured by the CMHC). While the stress test will be altered to some degree for uninsured mortgages, it will continue to be a rigorous process. For uninsured mortgages, the stress test will focus on the investor, rather than on the borrower, and will include stricter verification requirements.. Read more about mortgage stress test 2021 calculator and let us know what you think.
Frequently Asked Questions
Does the stress test apply to insured mortgages?
Rental property is a popular investment for Canadians looking to put their money to work. While this has long been a common practice for individuals, it is not for everyone. In fact, the OSFI (Office of the Superintendent of Financial Institutions) recently announced that uninsured mortgages will not be subject to the stress test when purchasing property that is not classified as a principal residence. The stress test will apply to all insured mortgages, starting Jan 1, 2021. Here’s how it will work.
What is the new stress test for mortgages?
The “stress test” is a relatively new mortgage requirement that looks at how your mortgage withstands a small but very real amount of unemployment. The idea is that if a homeowner is unemployed, they are less able to pay their mortgage and, thus, their house loses value. With the current stress test for uninsured mortgages, homeowners are required to sell their current home and buy a new one. This leaves them to find a new home before their due date, while having to pay for the closing costs on their new home. For most people, this can be a hard task. This is especially true for homebuyers who need to sell their existing home and move into a new one. The problem is the rules set up by the government.
Are mortgage rates going up in Canada 2021?
The Bank of Canada has apparently concluded that it needs to come up with a new set of mortgage rules to address the growing imbalance between the amount banks are charging for mortgages and the rate of interest they are earning from those loans. One way to do this would be to tighten the rules around uninsured mortgage loans. With the recent changes to the Ontario Securities Commission (OSC) stress test rules that became effective May 29, many are wondering how these changes will affect their mortgage applications. The new rules were put in place to protect consumers from high-risk mortgages, and turn a blind eye to poor credit history.
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