Real Estate

Mortgage stress test remains unchanged (for now) despite high interest rates

House is placed on the calculator and coin is on the calculator. mortgage stress test Photo by Puttachat Kumkrong/Shutterstock

High interest rates over the last 12 months have reduced purchasing power and made borrowing more expensive for Canadians. But the outlook isn’t all doom and gloom for cottage owners and cottage buyers to-be.

Last year, the Bank of Canada raised its key interest rate seven times to 4.25 per cent, its highest level since 2008, in effort to cool consumer spending and lower inflation. Canada’s five major banks moved to increase their prime lending rates 50 basis points, which increases borrowing costs for anyone with a variable rate loan.

In December, the Office of the Superintendent of Financial Institutions (OSFI) announced it would keep the minimum qualifying rate—a mechanism to test whether borrowers will still be able to afford their mortgage if interest rates rise—for uninsured mortgages the greater of the mortgage contract rate plus 2 per cent or 5.25 per cent. They did this to help ensure that mortgage holders can continue to pay their mortgages even during unfavourable conditions.

“In an environment characterized by sustained high inflation, rising mortgage interest rates, and potential risks to borrower income, it is prudent that lenders continue to test borrowers for adverse conditions,” said Tolga Yalkin, the OSFI assistant superintendent for Policy, Innovation, and Stakeholder Affairs, at a media briefing last month.

Cottage buyers must show they can qualify using their mortgage contract rate plus two per cent, which when compared to the 5.25 per cent used in past years, means they qualify for less, says Ottawa-based mortgage broker Andrew Thake.

Experts say that the high interest rates have worked as intended to slow the demand for big ticket items such as housing and vehicles. Home sales in Canada declined by 3.3 per cent from October to November in 2022, according to CREA.

However, high interest rates have made paying off home and cottage mortgages a strain for those who have them and made it even more difficult for those who want to secure one.

For those looking to buy

Buyers looking for cottages who don’t qualify for a mortgage that is large enough to purchase the type of property they’re interested in may be able to qualify in a year and a half when the stress test rates go down. Those applying for a mortgage today will qualify for less than they would have, had they applied a few years ago.

“You’d either have to put more down, or you just have to settle for a smaller place,” says Thake.

Thake suggested that people looking to buy while interest rates are high could also look at a fixed-rate mortgage for a shorter period of time—think two or three years—and if rates settle down after that, they could look at renewing.

Sometimes, when rates go up, cottage buyers can find savings elsewhere. “Even though interest rates are a bit higher, the price of the cottage is probably substantially lower than what you paid a year or two ago in some markets.”

This month, the OSFI is reviewing Guideline B-20, which includes the minimum qualifying rate (MQR) and other mortgage lending measures. The office launched a public consultation on January 12, which will take place until April 14, 2023.

Among the measures the OSFI is considering are restrictions on how much banks can lend to people whose mortgage exceeds a certain percentage of their gross income. This is something banks already do, but the changes may include tightening up the restrictions, says Thake.

Other changes may also include new debt servicing coverage restrictions, which would limit how much borrowers’ mortgage payments comprise a percentage of their income. Currently, most banks limit a borrowers’ housing obligations to 39 per cent of their gross income, but some major banks push that higher.

Additionally, the OSFI is considering implementing a new minimum interest rate that is applied in debt servicing calculations.

Featured Video