If you are among the many individuals who has been trying to buy a home in the last year or so, you’re well aware of the phrase “stress test.” This is a test that was announce late in 2017 by the OSFI (the Office of the Superintendent of Financial Institutions if you prefer the really long version.) Because housing prices were getting higher and higher, and because the Bank of Canada (BoC) announced its intention to hike interest rates, this test was introduced to make sure that home owners would not only be able to afford their original interest rate, but also the cost of higher rates yet to come. Some believe this was a good move as Canadian households were already at record debt levels. Before granting a mortgage, the OSFI wanted to know if home buyers would sink or swim, but now many Canadian would-be home owners can’t even get near the water.
Effects of the Stress Test
The stress test may have been necessary when it was implemented, but many are of the opinion that it’s time for it to go. The Canadian economy is softening and is expected to continue in that vein over the next 2 years. Despite the BoC’s insistence that they would be hiking interest rates, we haven’t seen any movement in 4 months and don’t expect to until the Spring at the soonest. There’s even a common sentiment that the stress test has done more harm than good. 10% of would-be home buyers who previously qualified can no longer get approved at the banks. If first-time home buyers can’t get into the game, sellers at the next tier up have no one to sell to. Same goes for the tier above that, and the one above that. The housing market is much like a line of dominoes. The first one triggers the next and so on. But the banks can’t push the first one over because the OSFI won’t let them. In fact, some buyers can’t even get approved to make a lateral move, let alone one that would take them upward.
So what are you to do? We’re all standing around the pool with our floaties on waiting (sometimes impatiently) for the life guard to blow the whistle signaling that we passed the test so we can jump in. Read on for advice to those who DO get the all clear, and those who DON’T.
Green means go
The one line of dominoes that seems to remain completely unaffected by the stress test is the rental market. If you do manage to pass the stress test and you’re looking to move from a property you own, we suggest you consider keeping it and using it as a rental property after you move into your next home. Now is a fantastic time to get into the rental market because many home-buyers who don’t pass the stress test end up having to rely on a rental instead.
Red means… what?
If you don’t pass the stress test, we feel for you. Being denied the means to keep a roof over your head is disheartening and frustrating. Whether you’re looking to buy your very first home, working to find a property that better suits a change in circumstances, or trying to find a home that better suits your equestrian lifestyle (jealous!), being denied can leave you feeling helpless. In this case, our suggestion is to find a cosigner. This might not feel ideal, for you or the cosigner, but it is a method that works over and over. And to ease a bit of the awkwardness that often comes with this kind of arrangement, Your Trusted Mortgage Broker has access to a lender who only requires the cosigner to remain on the contract for one year. After that, he or she is free to go. Win win!
If you’d like to learn more about these solutions and how best to deal with the mortgage stress test, please contact us today. Don’t put your swim goggles away just yet; we’ll have you swimming in no time!