5 things you need to know about Rule B-20 or Stress Testing
1. What is the Stress Test?
Also know as Rule B-20, the Stress Test introduced in 2018 requires banks to qualify borrowers at a mortgage rate that is 2% higher than their contracted rate or at the five-year benchmark rate published by the Bank of Canada. This ensures that anyone borrowing from federally regulated lenders can continue to make mortgage payments in the event that interest rates rise substantially.
2. Who is Impacted?
All six Canadian chartered banks have implemented the stress test as part of their mortgage underwriting process. Some provincially regulated lenders, like credit unions and financial institutions, are also voluntarily complying with the guidelines. This means that all borrowers getting, renewing or refinancing a mortgage from any of the federally regulated financial institutions will be subjected to the stress test. This applies even for mortgages requiring more than a 20 per cent down payment.
3. What does it mean for me?
The stress test reduces a homebuyer’s affordability by 20%-30%. In the pre-stress test environment, a household with an annual income of $100,000 and a fixed-rate 25-year mortgage at 2.84% could afford a house worth up to $726,145. Now, under Rule B-20, that same household can afford only $573,791 – a reduction of more than $150,000 or 21%. (Source: Ratehub.ca)
4. How has the housing market responded so far?
Falling Home Sales: Reduced affordability has resulted in home sales falling 2.4% on a year-over-year-basis from 2018 to 2019. New listings fell more than sales.
Higher Home Prices: Despite fallings sales, the average selling price for all types of homes was up 1.6% year-over-year, driven by condos and high-density low-rise homes.
Slowdown In Housing Market: All of this amalgamates to a housing market that is overpriced with pent-up demand that cannot be satisfied due to tougher mortgage qualification rules.
Falling Interest Rates: However, not all is gloom and doom. Fixed mortgage rates have been falling precipitously in recent weeks as yields on five-year bonds have been falling. Banks and other lenders get the money that they loan out in mortgages by borrowing it themselves on the bond market. Lower bond yields are generally “not a good sign from an economic standpoint,” says Janine White, vice-president of rate comparison website, Ratesupermarket.ca, “but it’s great for mortgage borrowers.”
Potential Change in Regulations: The Toronto Real Estate Board is calling on Ottawa to re-think the mortgage stress test and bring back longer mortgage amortization periods amid falling sales in the country’s biggest real estate market.
5. What are my options?
If are unable to qualify for a mortgage at a traditional Canadian Bank, here are some options to maximize your home buying potential:
a. First Time Home Buyer Incentive – Will be Implemented Fall 2019
If you are a first-time home buyer, you may be able to take advantage CMHC’s 10% interest-free mortgage loan provided that you satisfy the minimum qualification requirements:
– annual household income of < $120,000;
– 5% down payment; and
– mortgage value plus the CMHC loan <= $480,000.
b. Alternative or Private Mortgage
If you have run out of all other financing options at the big banks, an Alternative or Private lender can provide a lifeline for you. Call or Message us for a free/no obligation consultation to learn about your options.