As if we haven’t endured enough this summer with big shifts in market direction, appraisal issues and rising rates, the government announced that they are tabling new changes that require lenders to apply a stress test to non-CMHC deals.
I expect that like the last change that introduced stress tests, it will reduce an approval by around 20%.
Those with higher incomes and purchase prices will be less affected by these changes, but those targeting 20% down may see a material reduction in what they qualify for.
This appears largely targeted to the Toronto and Vancouver markets, where purchase prices have soared until recent months. Many properties are valued above $1 million dollars so this would normally exclude them from CMHC requirements, and the need for a stress test. Now that the stress test will apply to all mortgages, these markets will feel the effects the most.
The mechanism for this version of the stress test is a bit different, and it sounds like regulators may be listening, at least a little bit. The new stress test will require borrowers to qualify at a rate 2% higher than the rate they are applying for. This takes away the need to use the previous benchmark rate like we use for the CMHC stress test. It’s unclear if this will now apply to CMHC mortgage qualification as well. Currently, the rates will be very similar, and no mention of how variable rate mortgages would be qualified, if at all differently.
Initially, it sounds like the government isn’t rushing this through the system, allowing for some discussion from the public and industry until August 17th, with the new rules taking effect later in the year.
With rates expected to rise, this echoes the message the Fed’s are pushing that they are concerned about future affordability when rates increase. If you need to sell your house in Los Angeles, we will help you with that! We are cash home buyers Los Angeles. Check out here for more informations.
Bank of Canada Announcement
Looking forward to next week, the market is expecting a 25 basis point increase to the overnight rate, which will likely lead to the same increase in the prime rate. Variable rates and home equity lines of credit could face automatic increases. The market has already been pricing in the increase and we’ve seen bond yields jump 50 basis points in the last month.
Fortunately, fixed rate increases have not jumped by the same amount but it does the leave the door open for more increases if the market doesn’t reverse its trend.
All of this adds to the shift we’re seeing in the market with price reductions and homes sitting longer. Not to mention the normal seasonal slowdown we have over the summer months.
This affects a very small portion of the market, but still worth noting. The government wants to end the practice of bundling an institution’s 80% financing with another separate lender to lend an amount higher than normally allowed without mortgage default insurance (CMHC).
Some alternative lenders have partnered with unregulated lenders to provide purchase financing as high as 90% without requiring this insurance. The government is frowning on this practice and the potential pitfalls it brings with it when values start to correct and lenders are in a loss situation. Expect to see this end at the same time, if not sooner.
In summary, get your clients preapproved right away. It helps to secure an interest rate before more increases, and if like the last stress test change, it may protect them from these rule changes until the preapproval expires.