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Five important facts about the mortgage stress test

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P.T. Barnum once said, “There is scarcely anything that drags a person down like debt,” and while this can serve as a warning to debt-laden Canadians, it also speaks to the country as a whole.

The debt level in Canada is growing. In fact, recent studies revealed that the average level of household debt in the country has increased significantly over the last few years.

In an effort to mitigate this, the government, through the Office of the Superintendent of Financial Institutions Canada (OSFI), proposed some changes to Canadian mortgage and housing rules. These include the introduction of a new mandatory “stress test,” which was implemented early this year.

Under the ruling, Canadian buyers, including insured borrowers (those with a down payment of 20% and up) who borrow from a federally regulated lender will now be required to take the Mortgage Stress Test.

Lenders will have to assess all conventional mortgages using either the Bank of Canada’s benchmark rate, which is presently at 4.99%, or at the current contracted rate + 2% if that rate goes beyond the benchmark rate.

To further guide you on this topic, below are five points you need to keep in mind.

1. The Mortgage stress test is a TEST you need to pass.

Just like a school exam, the mortgage stress test is something you need to pass, and hopefully ace. The goal of the test? To measure risks of your application and determine how you will take charge of your loan payments.

The test will assess how much you, as a borrower, can afford given your debt-to-income ratio. Further, it also aims to ascertain if you will still be able to pay your monthly mortgage payments when rates increase. It will also evaluate some worst case scenarios and find out how you’ll manage your payments despite challenges.

By “stressing” or examining mortgages under pressure, banks will be able to see if you would be able to vouch for your loans should rates become even higher.

Also, it is important to note that, as a borrower, you are required to not exceed a 44% Total Debt Ratio (TDS), and spend less than 32% of your income on housing expenses such as utilities, mortgage payments, and real estate taxes.

2. It reduces your borrowing capacity.

So, you need to qualify for a certain amount for your mortgage application to be improved, what does that mean now?

The stress test will reduce your borrowing capacity, full stop. If you are looking for a home, you may need to look for a less expensive property. Mortgage-holders looking to refinance are more likely to stay with their lenders to avoid the stress test, but this is also saying that their limiting their options.

When numbers are calculated, you will see that the new stress test will automatically reduce your borrowing capacity by a minimum of 18.5% — the more significant the gap is between your pre-approved interested rate and the stressed rate, the more your borrowing capacity will be impacted.

Real estate agency Shupilov gave an example: “If you were pre-approved at 2.49%, your mortgage would now be subjected to a stress-test against a rate of either 4.49% (current rate +2%), or against the posted rate of 4.89%. Since the posted rate is higher, this is the rate that will be used in the stress test.” Once you cruch the numbers, your borrowing capacity will decrease by about 22.50%.

3. Be aware of your Gross Debt Service (GDS) and Total Debt Service (TDS) ratio.

If you are looking to increase your borrowing capacity, then you should start watching your Gross Debt Service and Total Debt Service ratio. Why? Increases in either will reduce your borrowing capacity.

These two terms have been mentioned before in this article, but you might not be aware of the part they play in the mortgage stress test.

Gross debt service

According to Allan Tran, business development manager at credit union Meridian, GDS is the percentage of your pre-tax income needed to pay your home costs. Aside from the stress-tested monthly mortgage payment, your lender will examine the monthly fees of your property, which include taxes or heating cost.

Once you have the sum of all these items, divide that by the amount of your gross monthly pay. “If the ensuing ratio is around 30-32 per cent, most lenders will give you the green light on your mortgage application,” said Tran in an interview with Global News.

Total debt service ratio

TDS measures how much of your income will go to paying your debts. Credit cards, car loans and all kinds of debits all make your up your debt payments. Total all of them, and if you want to pass the stress test it should not exceed more than 42% of your pre-tax monthly pay.

Tran warned though that just because you passed the GDS test, doesn’t automatically mean you’ll meet the TDS requirement.

Additionally, reducing your GDS/TDS ratio can increase your borrowing capacity. Here are some ways.

First, you can give a higher down-payment. This way, you can decrease your mortgage debt and your monthly mortgage costs. Second, you can try to increase your gross household income, either by finding additional sources of income or considering a job with a higher salary.

To manage your TDS, on the other hand, try settling your other debts and ensure you keep your loans at bay.

4. It all boils down to your financial capacity.

If you are buying a home on a tight budget, you will be more likely to be restrained by the stress test. Those who use a large chunk of their gross income on housing costs will also be at risk of failing.

Meanwhile, if you are buying a house that is less expensive than your pre-approved budget and should cost you less than 32% of your wage, you can relax a bit because the impact is lesser.

5. This creates opportunities to explore alternative lenders.

Given that the mortgage stress test is becoming a burden to some buyers, this can offer an an opportunity for borrowers to investigate alternative lenders, although some come with higher interest rates.

Because private and smaller lenders don’t rely on funding from banks and do not require stress tests, analysts predict that many potential borrowers will go to these institutions instead.

However, these alternative lenders are more susceptible to raising their interest rates, as well as being more selective in choosing borrowers they lend to.

Overall, the mortgage stress test is a complex process, but once you get the hang of it, you’ll realize that can be manageable.

Besides, going through the process can be worth the effort especially at present, with Canadian homes getting more and more expensive. In the recent report of Canadian Real Estate Association, it revealed that the average price of a house in August 2017 was an estimated $472,247, a 3.6% increase from the previous year.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

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Victoria real estate agent disciplined for false advertising, encouraging cash deal to avoid taxes

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A Victoria real estate agent is facing $9,000 in fines and a 60-day licence suspension after breaking several professional rules during the sale of her father’s half-million-dollar property, according to a decision by the Real Estate Council of B.C. 

Whitney Garside’s missteps — outlined this week in a disciplinary decision posted on the council’s website — included falsely advertising the property as being almost twice its actual size and advising the buyer they could avoid the property transfer tax if they paid cash directly to the seller.

The property on Burnett Road in Victoria was being sold in 2016 by the real estate agent’s father. That relationship was disclosed and isn’t among the reasons she has been disciplined.

According to the disciplinary consent order, Garside told the buyer — whose name is redacted — that by paying $42,000 cash on the side, the value of the property could be reduced to avoid paying the property transfer tax.

That cash arrangement was not shared with Garside’s brokerage, Re/Max Camosun, a failure that contravened the Real Estate Services Act.

The council also ruled that she “failed to act honestly and with reasonable care and skill” when she advised the buyer the property transfer tax could be avoided by paying cash directly to the seller. 

The council’s discipline committee also found that Garside committed professional misconduct when she failed to recommend the seller and buyer seek independent legal advice, specifically regarding the property transfer tax and the cash agreement.

Another issue the council considered professional misconduct involved the size of the property in question.

The council ruled that Garside published false and misleading advertising and failed to act with reasonable care and skill when the property was advertised as 8,712 square feet, when in fact a portion of the lot belonged to the Ministry of Transportation, and the actual size was just 4,711 square feet.

The discipline committee ordered Garside’s licence be suspended for 60 days, which will be completed Jan. 3, 2021.

She has also been ordered to complete real estate ethics and remedial classes at her own expense.

Garside was also fined $7,500 as a disciplinary penalty and $1,500 in enforcement expenses.

She agreed to waive her right to appeal the council’s discipline committee’s decision in September.

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Frisco apartment community sells to Canadian investor

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A Canada-based investor has purchased a Frisco apartment community as part of a larger Texas deal.

The 330-unit Satori Frisco apartments opened last year on Research Road in Frisco.

BSR Real Estate Investment Trust bought the four-story rental community that was built by Atlanta-based Davis Development.

Satori Frisco was more than 90% leased at the time of sale. The property includes a two-story fitness center, a car care center, a dog park and a resort-style swimming pool.

The Frisco property sold along with Houston’s Vale luxury apartments in a deal valued at $129 million.

“BSR recently exited the smaller Beaumont and Longview, Texas, markets and also sold noncore properties in other markets,” John Bailey, BSR’s chief executive officer, said in a statement. “We are now using our strong liquidity position to invest in Vale and Satori Frisco, modern communities in core growth markets with the amenities our residents desire.”

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House prices on Prince Edward Island continue steady climb

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Residential real estate prices on Prince Edward Island continue to climb at a rate higher than the national average, according to the latest report from a national organization. 

The Canadian Real Estate Association released monthly figures for November 2020 on Tuesday.

They show that the average price for a resale home on P.E.I. is about 21 per cent higher than it was a year earlier. 

Only Quebec had a bigger year-over-year increase, at about 23 per cent. Overall across Canada, prices were up 13.8 per cent year over year in the ninth month of the COVID-19 pandemic.

“For the fifth straight month, year-over-year sales activity was up in almost all Canadian housing markets compared to the same month in 2019,” the report noted.

“Meanwhile, an ongoing shortage of supply of homes available for purchase across most of Ontario, Quebec and the Maritime provinces means sellers there hold the upper hand in sales negotiations.”

That lack of houses coming onto the market compared to the demand means that in those provinces, there is “increased competition among buyers for listings and … fertile ground for price gains.”

There have been anecdotal reports for months that Prince Edward Island’s low rate of COVID-19 infection and looser rules around social activities have been encouraging people to buy homes on the Island. 

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