# New OFSI stress test



## sags (May 15, 2010)

Every mortgage applicant must now qualify at the 5 year posted interest rate or 2 points more than their actual mortgage.......whichever is higher.

The new rules include both insured and uninsured mortgages. 

It looks like the government is trying to stem the flow of people borrowing the 20% down payment to avoid stress testing rules.

The new rules will likely slow down home sales in some areas.


----------



## Mortgage u/w (Feb 6, 2014)

sags said:


> Every mortgage applicant must now qualify at the 5 year posted interest rate or 2 points more than their actual mortgage.......whichever is higher.
> 
> The new rules include both insured and uninsured mortgages.
> 
> ...


I doubt there will be much slow down. The stress test has been around for some time now and applying it to conventional mortgages is a minor tweak. It makes sense all around because most consumers are not capable of controlling their debt-loads. The only area I could see a potential slowdown is on refinances which may limit some consumers. But on purchases, I still think it will be business as usual.


----------



## james4beach (Nov 15, 2012)

The government still provides massive real estate stimulus via historically low interest rates and a giant CMHC program, so I'm not too concerned about "tightening".

If interest rates go up a few percent and CMHC shrinks, then we'll have something to talk about...


----------



## off.by.10 (Mar 16, 2014)

james4beach said:


> The government still provides massive real estate stimulus via historically low interest rates and a giant CMHC program, so I'm not too concerned about "tightening".
> 
> If interest rates go up a few percent and CMHC shrinks, then we'll have something to talk about...


The CMHC has been shrinking, most likely because of the need to qualify at +2% to get insurance. From the Q2 report:


> At 30 June 2017, insurance-in-force was $496 billion, a $16 billion (3.1%) decrease from 31 December 2016. New loans insured were $25 billion, while estimated loan amortization and pay-downs were $41 billion.


----------



## RussT (Jul 11, 2016)

Some of the reporting on the stress test has been confusing. Am I correct in thinking the test does not apply to mortgage renewals with the same financial institution but does apply to mortgage refinancing (increasing the size of the mortgage) even if with the same financial institution?


----------



## Mortgage u/w (Feb 6, 2014)

RussT said:


> Some of the reporting on the stress test has been confusing. Am I correct in thinking the test does not apply to mortgage renewals with the same financial institution but does apply to mortgage refinancing (increasing the size of the mortgage) even if with the same financial institution?


That's correct. The stress test does not affect renewals. It applies to purchases and refinances. Where there was already a stress test on insured business, the new changes simply apply to conventional business too.


----------



## sags (May 15, 2010)

Some people won't be able to shop around for better renewal rates as easily.


----------



## nathan79 (Feb 21, 2011)

Seems logical to me... I would like to think that most lenders were doing this already, though I doubt that was the case. It seems like way too many people are getting huge mortgages in areas where the average income is not that high.


----------



## AltaRed (Jun 8, 2009)

nathan79 said:


> Seems logical to me... I would like to think that most lenders were doing this already, though I doubt that was the case. It seems like way too many people are getting huge mortgages in areas where the average income is not that high.


There was reference to that issue in the OSFI release. Some lenders have been bending the rules on that to some degree, and OSFI intends to clamp down hard on institutions they provide oversight on from doing that going forward. OSFI acknowledges that may drive some of the market to go to lenders on the dark side, i.e. those not overseen by OSFI, but it won't be that much and if people are stupid enough to do that, i.e. to stand on the tracks inside a dark tunnel, we can't protect everybody from their own stupidity.


----------



## Mortgage u/w (Feb 6, 2014)

nathan79 said:


> Seems logical to me... I would like to think that most lenders were doing this already, though I doubt that was the case. It seems like way too many people are getting huge mortgages in areas where the average income is not that high.


It is logical and it really protects those who would overextend their debt-load. 

All insured loans were being qualified with a stress test - there was no way around this, really.
Only conventional loans were not qualified using a stress test - and alternative/private lenders of course.

The average income across Canada is below $30k so you can be certain that most people are getting huge mortgages, regardless their location.


----------



## james4beach (Nov 15, 2012)

off.by.10 said:


> The CMHC has been shrinking, most likely because of the need to qualify at +2% to get insurance. From the Q2 report:


Oh that's very interesting, thanks. But does this include all CMHC's loans and guarantees?

If it is shrinking overall, yes that's noteworthy I think! Maybe we are reaching the point of actual credit contraction in Canada.


----------



## Mortgage u/w (Feb 6, 2014)

CMHC's book has indeed shrunk. But the assets have simply passed on to the other insurers (Genworth and Canada Guaranty) who saw their book increase dramatically. However, CMHC stills covers/insures 90% of their books. So the figures that are being presented need to be clarified in order to justify how much the changes have really affected them.


----------



## sags (May 15, 2010)

It isn't a credit contraction. 

To skirt around the original rules, people borrowed the 20% from alternate lenders to avoid a stress test. It is obvious they wouldn't have passed the stress test.

So the CMHC holds fewer insured mortgages and the banks hold more uninsured mortgages. OSFI is concerned about the high risk debt the banks are holding.


----------



## AltaRed (Jun 8, 2009)

sags said:


> It isn't a credit contraction.
> 
> To skirt around the original rules, people borrowed the 20% from alternate lenders to avoid a stress test. It is obvious they wouldn't have passed the stress test.
> 
> So the CMHC holds fewer insured mortgages and the banks hold more uninsured mortgages. OSFI is concerned about the high risk debt the banks are holding.


The banks (secretly, if not openly) probably like the tightened new rules. I think they'd rather not feel they have to compete with their competitors for 'presumed' uninsured mortgages when they know the end game was being played and they could be left holding risky mortgages. It is certainly better for all of us...to potentially avoid a housing financial crisis).


----------



## Mortgage u/w (Feb 6, 2014)

sags said:


> It isn't a credit contraction.
> 
> To skirt around the original rules, people borrowed the 20% from alternate lenders to avoid a stress test. It is obvious they wouldn't have passed the stress test.
> 
> So the CMHC holds fewer insured mortgages and the banks hold more uninsured mortgages. OSFI is concerned about the high risk debt the banks are holding.


OSFI is concerned with CMHC's book - the banks are covered one way or another. Lets also not forget that a lot of conventional mortgages are still bulk insured so the government's risk continues.

It was not the stress test rule that saw people borrowing 20% from alternative lenders - it was the fact that CMHC no longer insured properties over $1mm and banks started implementing sliding scales to limit their own exposure.


----------



## tavogl (Oct 1, 2014)

I've had discussion after discussion with friends about the possibility of Canada RE bubble bursting, mainly Vancouver, which I think it should happen at some point, but everybody else says otherwise, people usually say that banks in Canada are heavily regulated unlike US banks, plus everything here is insured under the Crown? (wtf does that mean?) and that's why the RE bubble can't burst in Canada. Are they talking nonsense? I just' can't wrap my head around it doesn't happening, I personally think the insurance companies will go underwater too, like in the US.


----------



## AltaRed (Jun 8, 2009)

Well, Canada would most likely bail out CMHC, Genworth et al if they were to implode like Freddic Mac and Fannie Mae and AIG would have in the USA. That said, the taxpayer should not be on the hook, at least not before the insurers, and ultimately the banks paid with blood. Indeed, the banks have had to shore up their Tier 1 Capital to better weather a storm, AND their shareholders and debtholders take a full bath first by having NVCC compliant pref shares and debt. There is talk about the insurance companies having to do the same, but I gather it is complecated and they are a powerful lobby.

That doesn't mean there couldn't be a RE meltdown. Interest rates could rise dramatically in a home grown financial crisis and that would be the primary trigger causing home owners to potentially default. That was the issue in the USA...... homeowners not being able to meet payments on their ARM mortgages when interest rates notched up AND with the fraud around non-qualification. Substantial and unpredicted mortage interest rate increases is the house of cards.


----------



## nathan79 (Feb 21, 2011)

Mortgage u/w said:


> The average income across Canada is below $30k so you can be certain that most people are getting huge mortgages, regardless their location.


Yeah, it doesn't quite add up. I make more than 30K (but less than 50K) and I can't even qualify for a 200K mortgage using the calculators on bank websites.


----------



## RussT (Jul 11, 2016)

Is it possible that when the new rules take effect (arguably today) one could re-finance by simply renewing at her current bank, then applying for a HELOC?

For example: 
Appraised value: $350,000
Current mortgage: $200,000
Current amort: 25 years
Current rate: 3.5% variable
Current annual salary: $40,000
Desired re-financing amount: $250,000

Could someone in this situation simply renew the existing mortgage and then apply for a $50,000 HELOC?

By the way, I'm not saying this is a wise strategy. I'm just wondering if this gets around the stress test for current property owners.


----------



## Mortgage u/w (Feb 6, 2014)

^ you could probably qualify easier since the stress test will be applied to the $50k vs the whole $250k.


----------



## twa2w (Mar 5, 2016)

RussT said:


> Is it possible that when the new rules take effect (arguably today) one could re-finance by simply renewing at her current bank, then applying for a HELOC?
> 
> For example:
> Appraised value: $350,000
> ...


Actually the new rules include restrictions on co-lending which I have not yet been able to clarify but from my reading so far it sounds like you could not get the HELOC at the same bank as your first mortgage as the co- lending rules apply and your full mortgaging is subject to the stress test.. If you obtain the HELOC elsewhere, it sounds like you are ok. However, most banks are reluctanct to offer 2nd mortgage helocs behind a mortgage that is not theirs depending on the province and original amount of mortgage.

It will be interesting to read more once more clarification is provided.


----------



## AltaRed (Jun 8, 2009)

twa2w said:


> Actually the new rules include restrictions on co-lending which I have not yet been able to clarify but from my reading so far it sounds like you could not get the HELOC at the same bank as your first mortgage as the co- lending rules apply and your full mortgaging is subject to the stress test.. If you obtain the HELOC elsewhere, it sounds like you are ok. However, most banks are reluctanct to offer 2nd mortgage helocs behind a mortgage that is not theirs depending on the province and original amount of mortgage.
> 
> It will be interesting to read more once more clarification is provided.


I saw commentary that OSFI would clamp down severely on this practice on any institutions in which it has regulatory oversight. This practice may be 'dead in the water' for uninsured mortgages and one would have to go to the alternative lending market for such HELOC/2nd mortgage above LTV of 80%.


----------



## fplan (Feb 20, 2014)

The main difference between Canada and USA is, in Canada people cannot walk out of the mortgages /homes while in usa people can walk out.. i dont know whether its true or not.. if you can walk out of mortgage ,then not a bad idea to buy a home.. if something goes wrong, just walkout.. but put only 5% down..


----------



## nobleea (Oct 11, 2013)

fplan said:


> The main difference between Canada and USA is, in Canada people cannot walk out of the mortgages /homes while in usa people can walk out.. i dont know whether its true or not.. if you can walk out of mortgage ,then not a bad idea to buy a home.. if something goes wrong, just walkout.. but put only 5% down..


Alberta are non recourse mortgages, which means you can just walk out on them and send the bank the keys. I think AB is the only province where that is standard.


----------



## AltaRed (Jun 8, 2009)

It's not universal and only applies to uninsured mortgages, i.e. LTV<80% http://www.cbc.ca/news/canada/calgary/jingle-mail-alberta-housing-1.3430867


----------

