The New Federal Government Mortgage Stress Test -- What Does it Mean?

Ok some of you may have heard about the new federal government “stress test” on mortgages revealed last week.  For those that have or haven’t here’s the brief summary, effective January 1st, 2018:

• the “stress test” will affect all mortgages regardless of downpayment
• the purpose of these regulations is to ensure all borrowers can afford a rate 2% above their negotiated rate
• reduces amount they can qualify for by about 20%

Here’s an example of the impact of this new regulation provided by our friends at 4FrontMortgages:

“A client could negotiate a 5 year fixed rate of 3.09% however the lender will need to base their approval on the client’s ability to qualify at a rate of 5.09%. On a $500,000 mortgage the client would need to "have the ability" to pay an extra $568 per month.  In reality, prospective purchasers who want to borrow at the maximum threshold will need to reduce the amount they borrow so their new mortgage payments are $568 less, in this example, which is roughly equal to $100,000. For those clients who are not approaching their upper borrowing limits, the new rules will have little impact”

What does this mean? 

Homebuyers will have to lower their purchase price expectations, come up with more downpayment, or look for a co-signer to help them. One very important thing to note is that any homebuyer with less than 20% downpayment already underwent this stress test.  
A majority of homebuyers I meet that are looking to buy a place have less than 20% so it’s a smaller part of the home buyer market.  Undoubtably these new regulations will slow down the market next year but by how much is yet to be seen.  Uncertainty always creates hesitancy in homebuyers that don’t need to buy at that time. One thing seems certain is that it will not improve the affordability of the housing market.