Do You Understand the B-20 Stress Test?

A recent survey shed light on the lack of knowledge surrounding the B-20 Stress Test.  The B-20 Stress Test has been in place for more than a year.  Surprisingly, 43% of Canadians are not confident they fully understand the guidelines.

In this blog, let’s take a look at what the B-20 Stress Test is and how it affects Canadian’s borrowing power.

What Exactly Is B-20?

B-20 Stress testThe regulator of all Canadian Financial Institutions, OSFI, introduced what they believe to be prudent residential underwriting guidelines.  All Federally regulated lenders must follow these strict guidelines when qualifying new mortgages. The new changes took place on January 1st, 2018.

The stress test forces borrowers to qualify using an interest rate 2% higher than the actual rate they are paying. (see charts below)

These underwriting guidelines have been created at the insistence of the Financial Stability Board, the financial oversight organization of all G20 nations.  The creation of these guidelines is a response to runaway home prices combined with low-interest rates.

How Does The Stress-Test Affect Me?

On average, the home purchasing power for all income brackets will be reduced by 15-25%.  That’s right, after January 1st, 2018, most Canadians access to credit was cut by up 25%.  This is significant. Let’s look at some examples for clarity.

Purchasing A New Home

Potential home buyers will be affected when qualifying using the stress test. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Up To December 31, 2017 After January 1, 2018
Target Rate 3.34% 3.34%
Qualifying Rate 3.34% 5.34%
Maximum Mortgage Amount $560,000 $455,000
Available Down Payment $100,000 $100,000
Home Purchase Price $660,000 $555,000

Refinancing Your Mortgage

Let’s stick with our earlier example and use a dual-income family earning $85,000/year.  The value of their home is $700,000 with a mortgage balance of $415,000.  Their lender will refinance to a maximum 80% LTV. ($560,000).  They should be able to access $145,000 of equity after paying out their current mortgage.

Up to December 31, 2017 After January 1, 2018
Target Rate 3.34% 3.34%
Qualifying Rate 3.34% 5.34%
Maximum Amount Available to Borrow $560,000 $560,000
Remaining Mortgage Balance $415,000 $415,000
Equity Able to Qualify For $145,000 $40,000

Source (TD Canada Trust)

Under the B-20 Stress Test, they lose over $100,000 of borrowing power.

Is B-20 Stress Test Here To Stay?

The market appears to be feeling the effects of the stress test.  Some industry people are calling for a reduced stress test rate of 1%.  The Bank of Canada seems hesitant to make any changes at this time.

CIBC World Markets Inc. deputy chief economist Benjamin Tal cautioned that the well-meaning regulations have become “a bit too severe at this point in the game.”

“I’m not saying to kill B-20 by any stretch of the imagination,” he told The Globe and Mail. “I’m just saying it should be a bit more flexible, and more dynamic, to reflect market conditions.”

B-20 has made understanding mortgage qualification extremely difficult to understand for the average Canadian.  This only enforces the need for a qualified, independent review of your file when shopping for your mortgage.  Please reach out to me at any time with any questions regarding the B-20 or mortgages in general.

Brent 778-558-5159.