As of Jan. 1, 2018, almost all Canadians borrowing from a federally regulated mortgage lender will face a stress test.
New guidelines by Canada’s federal financial regulator will require lenders to vet even applicants with down payments of 20 per cent or more using rates that are considerably higher than their contractual mortgage rate.
The rules, which are meant to ensure that Canadians don’t take on too much mortgage debt, effectively reduce the size of the mortgage that borrowers can obtain given their financial situation.
“If you were able to buy a townhouse or a semi before, you might only be able to buy a condo after,” said David Larock, a Toronto-based independent mortgage broker.
Only Canadians renewing their mortgage with their existing lender may be exempted from the stress test. But even then, financial institutions may decide to apply the tougher standard, the Office of the Superintendent of Financial Institutions has previously told Global News.
But the new regulation doesn’t apply to credit unions, which are regulated at the provincial rather than federal level.
That’s why analysts and mortgage brokers expect a number of Canadians to turn to these lenders for their mortgage needs, starting in the new year.
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The credit union advantage, in theory
Canadians hoping to buy a house in 2018 and who are able to afford a large down payment might be able to get a bigger mortgage through credit unions.
According to estimates, the new stress test means the same borrower would qualify for a mortgage that is 15-20 per cent smaller in 2018 than what she would have been able to get in 2017, said Bryan Freeman, vice president and mortgage agent at CanWise Financial.
By using a credit union in 2018, homebuyers could potentially sidestep the stress test and get a larger mortgage.
Credit unions could be an attractive option for homeowners with low ratio mortgages whose loan comes up for renewal after Jan. 1.
Under the new rules, Canadians who want to shop around instead of renewing with their existing lender will have to undergo the stress test.
But they could, potentially, renew at a lower interest rate without worrying about the new rules with a credit union.
Credit unions are a good option anyway, but they might become a “great option” for mortgages with larger down payments in the new year, said Freeman.
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Mortgage brokers offer some cautionary notes
Despite the potential advantages of turning to credit unions, Canadians shouldn’t assume the current gap between federal and provincial rules will last forever.
“It’s still a little bit unclear if credit unions are going to adopt the new stress test rules,” said Freeman, but that’s a concrete possibility.
Indeed, Larock knows of two credit unions who have voluntarily adopted the stress test.
Credit unions will be leery of a flood of mortgage applications from riskier borrowers who wouldn’t qualify at higher interest rates, he noted.
And if individual lenders don’t act on their own initiative, provincial regulators are sure to step in swiftly to harmonize regulations, if they notice a surge in mortgage volume at credit unions, he argued.
There’s also the question of whether you should aim for the largest possible mortgage, anyway.
The new mortgage rules were designed “to ensure that anyone taking on mortgage debt at today’s ultra-low rates can afford them to rise in future,” Larock wrote in a recent blog post.
Indeed, the Bank of Canada has already started raising interest rates, with two hikes so far this year. And economists expect rates to climb further next year.
Making sure your finances can absorb those higher mortgage rates doesn’t seem a bad idea.