Mortgage Stress Test Calculator in Canada

December 28, 2017 12:07 am Published by

2018’s new and beloved stress test. Brought in by yours indeed, OSFI.

Starting off 2018 with a bang. Appropriately named, these new mortgage stress test rules will have an exciting effect on the public and industry professionals alike.

Stress tests are designed to consider a worst-case scenario, therefore, making market fluctuations more bearable and ensuring stability. By doing this, lending institutions are left with “breathing room,” meaning if mortgage rates rose, their clients would still be capable of paying the higher interest rates, equating to larger mortgage payments.

So where does this apply?

Lenders are operating under the rules and regulations of OSFI (Office of the Superintendent of Financial Institutions), will be required to implement this new mortgage stress test in Canada. In short, this is banks, trust companies, loan companies and all of the most common places the general public would search for a loan from. For a full list, you can visit http://www.osfi-bsif.gc.ca/Eng/wt-ow/Pages/wwr-er.aspx

What is OSFI?

OSFI is an independent agency of the Government of Canada. It is responsible for the prudential regulation and supervision of federally regulated financial institutions, as well as private pension plans subject to federal oversight. OSFI monitors these institutions for solvency, liquidity, safety, and soundness.

A calculator used for mortgage stress test

How is this calculated?

All parties on the link mentioned above will now be required to qualify all conventional mortgages (below 80%) at the Bank of Canada’s five-year benchmark rate, currently sitting at 4.99%, or at your qualified contract rate + 2%, if it exceeds the benchmark rate.

Example:

  • 3.2% mortgage rate + 2% (stress test) = 5.2% – this is the rate you will have to qualify at.
  • 2.5% mortgage rate + 2% (stress test) = 4.5% – Since this is below the benchmark rate; you will be required to qualify for a mortgage at the benchmark rate of 4.99%

What is a mortgage rate stress test?

These stress test ties directly into your ability to service debt. Lenders have two calculations for this, which are GDS (Gross Debt Servicing) & TDS (Total Debt Servicing).

GDS – a percentage of a borrowers income that is required to pay a mortgage, property taxes, heat and 50% of condo fees (if applicable).

TDS – a percentage of a borrower’s income that is required to cover all GDS costs, as well as other debt obligations such as car and credit card payments.

These calculations for a mortgage stress test calculator are:

GDS: Principal + Interest + Taxes + Heat / Gross Annual Income

TDS: Principal + Interest + Taxes + Heat + Other Debt Obligations / Gross Annual Income

Typically, as an industry standard, lenders have their GDS ratio at 32% and their TDS ratio at 40%. For borrowers that have a higher credit score (and other factors), these ratios can be extended to a maximum of GDS 39% and TDS 44%.

What effects will this have?

Let’s take a look at two scenarios. One is before the new stress test, and one with the new stress test being implemented. For the sake of the best possible outcome, we will be using the ratios of 39% for GDS and 44% for TDS. We will also not be considering any credit card debt, alimony payments or any other ordinary expenses. This indeed is a best-case scenario.

Scenario 1

John has:

  • A gross annual income of $80,000
  • A down payment of $150,000
  • A purchase price of $500,000
  • A contract rate of 3.5% compounded semi-annually, with a $350,000 mortgage ($1,747.45 per month)
  • Property taxes of $3,000
  • Heating costs of $50 per month ($600 per year)
  • Condo fees of $250 per month ($3,000 per month)
  • A car payment of $200 per month ($2,400 per year)

GDS: $20,969.40 (mortgage per year) + $3,000 (property taxes) + $600 (heating) + $3,000 (condo fees)  / Gross annual income of $80,000

GDS = 34.46%

TDS: $20,969.40 (mortgage per year) + $3,000 (property taxes) + $600 (heating) + $3,000 (condo fees) +$2,400 (car) / Gross annual income of $80,000

TDS: 37.46%

Scenario 2

Using all of the figures from above, but we will be adding 2% to John’s Canadian mortgage rate. His monthly mortgage payment is now $2,136.37 which is an increase of $388.92 per month. He won’t be paying this extra amount; he just needs to show that he can pay it.

GDS: $25,636.44 (mortgage per year) + $3,000 (property taxes) + $600 (heating) + $3,000 (condo fees) / Gross annual income of $80,000

GDS = 40.3%

TDS: $25,636.44 (mortgage per year) + $3,000 (property taxes) + $600 (heating) + $3,000 (condo fees) +$2,400 (car) / Gross annual income of $80,000

TDS: 43.3%

John GDS is over 39%, so he does not qualify for this mortgage anymore. This means he will have to look at increasing his down payment or look for a cheaper home. This demonstrates what will happen to John’s buying power as it has now been reduced by 22.26%.

A low debt load and high credit score have been considered in these scenarios. We will stay tuned over the course of 2018 to see the actual length of these effects, in the real world.

Article is courtesy of Zack of Deposit FinancingNo Deposit Home Loans

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