Nearly one in five Canadian homebuyers are failing new mortgage stress test

By: Jessica Mach on July 25, 2018

The “stress test” that was introduced by the Office of the Superintendent of Financial Institutions (OSFI) on Jan. 1 has stopped 100,000 Canadians from buying the homes that they want, according to an estimate by Mortgage Professionals Canada (MPC).

The estimate comes from a report released by the organization on Wednesday, which looks at Canada’s mortgage and housing markets, and pays particularly close attention to the impact of OSFI’s stress test rules. Of the 100,000 people who could not afford their first home choice, the report said, many were still able to buy — but were forced to either downsize or increase their down payment.

Still, some were barred from buying altogether even if they would have been able to do so before Jan. 1. An estimated 18% of buyers who are otherwise be able to afford their preferred home would fail the stress test, which requires buyers to prove that they can afford either their bank’s five-year posted rate, or two percentage points higher than the rate their bank or broker offers them — whichever one is higher.

Since the stress test came into effect, buyers need an average of $28,750 more to qualify for a mortgage.

And securing a mortgage is not the only hurdle that has become more difficult to overcome due to changes in mortgage lending rules. For many buyers, it’s also become more difficult to build up a down payment.

According to the MPC, new lending rules have made it more difficult to borrow down payment funds from a bank. While most of the people analyzed in MPC’s report relied mainly on their personal savings to build up their down payments (personal savings accounted for over a half of their down payment funds), some people are still bulking up their down payments with money borrowed from banks, as well as money from their parents.

The new obstacles presented by tighter mortgage lending rules is one reason why Canada’s housing market has slowed in 2018, MPC said. In recent years, other factors — including higher home prices — have pushed down home ownership rates: in 2016, the rate stood at 67.8% in Canada — a 1.2 percentage point drop from 2011.

MPC estimates that between 2016 and 2021, the rate will drop even further now that it takes longer for buyers to save and prepare to buy a home.