We received another clarification today about mortgage pre-approvals under the more stringent stress test.
As reported last week, banks currently have the discretion to underwrite uninsured pre-approvals based on today's 4.79% minimum mortgage qualifying rate (MQR).
That's true even if the borrower's home purchase doesn't close until after June 1 — the day the stricter 5.25% stress test begins.
But there's a catch.
"We actually sought clarification from OSFI about this point," an official at the Canadian Banker's Association told us today. "OSFI told us that the key element of whether the old mortgage qualifying rate applies is that there is a signed purchase and sale agreement submitted prior to the [June 1] effective date."
In other words, if your mortgage is pre-approved before June 1, the easier (current) stress test applies, even if your purchase doesn’t close until after June 1. But, you must also have a signed purchase and sale agreement before June 1.
Otherwise, you have to prove you can afford an even higher interest rate — at least 5.25%, assuming OSFI doesn't change this rate.
It would have been helpful had OSFI noted this in a consumer FAQ on April 8, when the new stress test was announced. That would have avoided borrower confusion.
Imagine how upset a buyer would be if she were relying on a pre-approval secured under current rules, and then after June 1 her lender advises that she no longer qualifies.
For some, there's a lot riding on details like this. The new stress test reduces buying power by up to 4% or more. That's material for those it affects—over $28,000 on the average home price.
OSFI said last month, "...We estimate that up to 10% of borrowers would have exceeded individual banks' Total Debt Service ratio thresholds" had the new stress test been in place in the third and fourth quarters of 2020.
That's all the more reason to be clear with people about how pre-approvals are stress tested. It almost makes us wonder if the vaguery was intentional to avoid masses of people running out to get pre-approved under the easier stress test — before the new rule kicks in.