New Stress Test for Real Estate Mortgages

Published on 29 August 2022, 07:22:56 AM

Refinancing your mortgage or just changing addresses, a new stress test for real estate mortgages means you need more equity in your home to stay or get into Ontario’s mortgage market after June 1, 2021.

Axess Law’s real estate lawyers ensure your mortgage renewal or property purchase is legal. We have affordable real estate lawyers in Greater Toronto Area and Ottawa, or anywhere in Ontario by video conference. If you have Ontario real estate law questions, we have answers.

Why a Stress Test for Real Estate Mortgages is Mandatory

Mortgage requirements for home buyers and existing property owners have been tightened up by the Office of the Superintendent of Financial Institutions (OFSI) to create a mortgage affordability buffer. The change reduces the risk of mortgage default from high household debt. 

Demand for mortgages by Ontario home buyers and Canadians can decline when jobs and business loans are in short supply. That leaves potential buyers and business owners locked out of residential or commercial mortgages flooding back into the property market in more prosperous times.

As home buying heats up, so does pressure on the Bank of Canada to raise the overnight interest rate mortgage lenders rely on to set their own. A resurging economy keeps Ontario (and Canada) working. When interest rates go up, mortgage lenders need reassurance borrowers can qualify for new or continued financing. 

What is Stress Testing for Real Estate Mortgages?

A stress test for real estate mortgages is required because of lenders’, and buyers’, appetite for risk.

The OFSI’s “B-20” stress test is not tied to the price of housing, as home owners and buyers outside hot markets with escalating prices like Toronto or Vancouver might hope. Instead, the test targets risk taking by mortgage lenders.

In fact, high ratio lenders like CMHC, Genworth (now Sagen), and Canada Guaranty have required a mandatory stress test for real estate mortgages for insured borrowers (those with the lowest down payments) since 2018.

The new rules introduced a stress test for low ratio, uninsured mortgages for the first time. Buyers or owners with 20% or more down for a mortgage now have to show they can afford their payments if rates climb when they renew in future.

Predictably, how the stress test impacted the demand for real estate is to reduce buyers’ purchasing power. Keeping prospective and current home owners from borrowing more than they can afford in higher interest rate scenarios stabilizes the mortgage market.

Why Are Home Prices So High?

Home prices are high when buyers are prepared to pay the price to get into or stay in the housing market. 

Over half of Toronto buyers are first timers, and that makes small spaces and condos more and more attractive. In contrast, your parent’s generation has seen huge leaps in the value of single family homes, but they’re staying put.

And, the old saying is true — they’re not making any more land in big cities. Development charges to tear down and replace old homes, plus land transfer taxes, add to your costs. (Fortunately, first timers have options.)

Calculate Your Mortgage Limits

To calculate mortgage affordability under the new rules, pick the higher of:

• 2% over the interest rate you want
• or a 5.25% interest rate.

Include property and Ontario land transfer taxes, heat, and 50% of monthly strata fees. Add municipal transfer taxes for Toronto homes.

Now add other monthly debt like loans and credit cards. For credit cards paid in full, estimate $15. Otherwise, use three to five per cent of amounts owing. Leave out short-term loans (six months or less). Add in spousal or child support payments.

That gives lenders your minimum monthly expenses. Tally up income from salaries, self-employment, tips, bonuses, or commissions. Include income from a rental suite and child or spousal support. Go to any online mortgage calculator and input your totals. Subtract down payments you saved or borrowed. 

If you qualified for a $500,000 mortgage loan before June 2021, your limit could be $479,000 now, according to Rates.ca. With 20% down, you can afford a condo or townhouse in Greater Toronto Area or Ottawa for $600,000. That can still get you into communities like Oshawa, Pickering, or Brampton. 

Tips for homeowners: you won’t qualify for a CMHC or other insured mortgage for a home that previously had a low ratio mortgage. 

Getting Private Mortgages in Ontario

If you’re genuinely worried about surviving a stress test for real estate mortgages, try a new, unregulated lender. It could tide you over until your finances or credit score improve.

Private mortgages are a backup plan if your mortgage renewal gets turned down. Interest rates are higher (6% to 18%) and loan terms shorter, but you won’t face the stress test for real estate mortgages.

Private lenders and credit unions aren’t regulated by OFSI’s lending restrictions. You can apply for refinancing without worrying about qualifying all over again. And without that cumbersome stress test for real estate mortgages, you just might pick up a new or second loan with less attention to your credit score.

Private mortgages in Ontario are based on your home equity only, in case your lender needs to sell. If you’re in a bind, you could score short-term, interest-only rates, or get an in-between mortgage while you market your own home.

Axess Law closes real estate transactions with private lender mortgages anywhere in Ontario. We can review your agreement of purchase and sale for Ontario private sales. Call our toll free phone line (1-877-402-4277) for an online video call appointment with a real estate lawyer near you. 

Why You Need a Real Estate Lawyer

Stress tests for real estate mortgages mean you need to keep your options open.

Axess Law advises on revising agreements of purchase and sale for mortgage financing contingencies. Don’t get caught short if new stress test rules make finding financing tricky or refinancing a mortgage more time consuming than you expected. Your agreement could lapse unless you have legal advice on clauses to include in your offer to purchase. 

We search the title, check for financial liens and easements, and correct land titles errors delaying the transfer of your home. And if your financing falters, Axess Law advises you if a real estate deal falls through who gets the deposit. 

Affordable Real Estate Lawyers, Anywhere You Are

Access lawyers for less in Greater Toronto Area, Ottawa, or anywhere in Ontario when you buy, sell, or transfer property. Axess Law’s flat fee real estate lawyers are affordable, and our rates are all inclusive (excluding taxes, disbursements, and third-party charges). Axess Law offers you only the legal services you absolutely need. Your final invoice includes no surprises or hidden charges. Your itemized statement of adjustments is explained when we deliver it, and we answer any questions you have about it.

Find a real estate lawyer in Ontario.

Book Online or In Person Appointments

Book appointments online or call our 647-479-0118 lawyer line for appointments (toll free to 1-877-407-4207) for in-person appointments at Greater Toronto Area or Ottawa law offices near you. We do remote video conferences online anywhere in Ontario. We’re available 7 days a week, day or evening, at times convenient for you.

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