In a BCREA News Release it was announced that a new stress test for home buyers seeking an uninsured mortgage (with 20% or more down payment) will need to qualify at the higher of the posted 5-year qualifying rate or 2% above the rate received from the bank. According to Daily Digest the 5-year posted rate is 4.89%.
The stress test applies to all federally regulated financial institutions and is effective January 1, 2018.
Last year the federal government introduced a similar stress test for insured mortgage (less than 20% down payment) of needing to qualify at the 5-year posted rate. With mortgage rates trending above 3% for a 5 year fixed mortgage, the effect of this new rule is that home buyers with a large down payment will have a stress test higher than those with a lower down payment. These buyers will likely need to qualify at 5.09% or 5.19% while buyers with less than 20% down need to qualify at the posted 4.89%. Buyers with a larger down payment need to qualify at a higher rate.
BCREA estimates the new stress will lower purchasing power (the price buyers will qualify for) by about 20%. They further state: Like past tightening of mortgage regulations, we anticipate that the market impact will be sharp but temporary. In the past, we have seen home sales decline in the 3 to 9 months following the implementation of tighter mortgage lending standards, with the severity of the impact fading within one year. However, these new regulations impact a larger pool of mortgages and so the impact could be more significant than in the past. (emphasis added)
It will take some time assess the impact of this change on the housing market. For the Island, with low inventory levels and strong demand, the impact will be less than in other slower markets. One conclusion I have, based on the two stress tests, is that the federal government is expecting interest rates to climb and are attempting to shield home buyers over stretching themselves.