It’s dawned on me that I may have exhausted my options with written and visual content about the stress test. I’ve already written and talked about it at great lengths, so I promise this one will be the last time I talk about it (unless it’s brought back by popular viewer demand – as always, please let me know what you think).
In my opinion, the stress test has been completely overblown by the media, and I’m guilty of adding fuel to the fire sometimes.
The effects of the stress test in the resale condo market have been almost zero. Funny enough, for every resale deal I’ve transacted on in January, there have been multiple offers with the exception of one. However, through a series of cascading events, the stress test does have some effect on the pre-construction side (new condos); albeit not to the extent that the Liberal government wanted.
Now Trending: “Mortgage Commitment” Required – I’ve noticed a trend this month. It looks like its going to stay so I wanted to share this with you all. When you buy a pre-construction condo, the developer will typically ask you for a mortgage pre-approval to show that you have the ability to purchase this property right now even though it will be complete in 3 – 5 years time. Typically, it’s a fairly useless piece of paper because the mortgage pre-approval usually lasts for only 3-4 months. So when a pre-construction condo completes in 3-5 years time, that pre-approval has long been void.
Instead of pre-approvals, as of late, developers have been asking buyers to provide a mortgage commitment instead. Mortgage pre-approval vs mortgage commitment, it sounds like it’s the same thing… right? So, what’s the big deal?
A mortgage commitment is completely different and the big deal is exactly what is destroying any first time home buyer’s chance at getting into the market via pre-construction. It all boils down to what each letter means and the requirements to get them.
The Difference – In a mortgage pre-approval, the lender basically runs a quick check on your ability to buy based on your income and credit score. It’s like giving someone an approximation, an estimation if you will, of how much they could buy.
In a mortgage commitment, the lender will actually go to the underwriter to ensure that you are cleared for closing. The details such as address, price, closing date, loan-to-value ratio, interest rate, amortization years and the term will all be present. It’s like getting the bill at the end of a meal – every line item is written out for clarity, not an approximation.
A Series of Unfortunate Events – Let me guide you through the series of events that one would encounter in order to illustrate how this all ties together.
In order to get a mortgage commitment, you must go to one of the 5 major banks (RBC, TD, Scotia, BMO, CIBC) to get it. All of these major banks are governed by OFSI.
If you didn’t know already, OFSI was the one responsible for implementing this stress test.
You cannot bypass the stress test by an alternative lender if you need a mortgage commitment from the major banks (i.e., going to a B-lender won’t work for mortgage commitments).
So what does this all mean? First time home buyers are out of luck if they can’t get a mortgage commitment AND pass the stress test with their newly purchased condo despite having the deposit.
This means they will have to return the unit. This actually happened twice in the last month with a two of my clients at different banks and developments. You can imagine their disappointment.
This isn’t a big enough deal to create any waves in the market, but it does serve as a reminder that all of these government interventions have only made it harder for first time home buyers to buy. They are definitely getting the short end of the stick with these new rules. Good job liberal government, your recent policies are short-sighted – yet again.
To end this article on the bright side though, if you’re an existing homeowner or investor, then this stress test may not be as big of a deal to you. Continue picking up real estate while you can, in the case that the lending policies go awry again.