Stress Testing May Start Sooner

On Tuesday the government announced a January 1, 2018, implementation date for its new uninsured mortgage stress test.

In that announcement it said something else that many glossed over: “Where possible, federally regulated financial institutions are expected to comply with the principles and expectations set out in this guideline as of the date of this letter [October 17, 2017].”

OSFI told us today, “Banks are expected to implement the guideline as soon as possible, and we will be monitoring their progress leading up to Jan. 1, 2018.”

For those buying a home, the regulator added, “Depending on when the financial institution starts implementing the new B-20 rules, the new 2% stress testing may or may not apply before January 1, 2018, no matter when the house purchase closes.”

We’re not aware of any banks imposing the stress test on borrowers yet, but we have no doubt that many lenders will start the new stress test early.

What to Do

If you need a mortgage or HELOC in the next 120 days and you expect your debt ratios to be high, apply ASAP. You don’t want to lose lender options as banks start announcing they’re implementing the stress test ahead of time.

Quick Tip:  A “high” debt ratio would be anyone with a gross debt service (GDS) ratio above 33% or a total debt service (TDS) ratio above 38%, using today’s rates. OSFI’s new stress test will likely put these people over the acceptable debt ratio limits. You can calculate your own debt ratios here or call a mortgage professional.

A Poorly Planned Roll-out

We spoke to banks today who told us they’re still trying to sort out how things like pre-approvals, purchase agreements signed before January 1, 2018, (but closing after) and pre-construction purchases will be handled. Consumers and most in the industry are equally baffled.

OSFI didn’t release any public guidance on such fine points. With all due respect to the regulator, it totally dropped the ball here. B-20 3.0 is the biggest mortgage rule change of all time. How hard would it have been to put out FAQs on this stuff?

OSFI wasn’t able to provide any further info on these questions by press time, but it did tell us the following about pre-approvals: “…Stress testing is generally done at the pre-approval stage as the lender has to ensure the borrower has the capacity to reimburse the loan.” So we suspect that banks will start pre-approving people at the higher qualifying rates in the near future, making the date of the customer’s purchase agreement or closing irrelevant (for pre-approvals).