Rules and Stress Test

In this episode of MortgageEase Unfiltered, Nicole Farrugia discusses significant changes in mortgage rules, focusing on the stress test adjustments for mortgage renewals and proposed refinancing rules for secondary suites. She explains the implications of these changes for borrowers and emphasizes the importance of staying informed in a rapidly evolving mortgage landscape.

Takeaways

• The stress test ensures mortgage affordability under unforeseen circumstances.
• Borrowers must qualify at the higher of the Bank of Canada benchmark or contract rate plus 2%.
• The removal of the stress test for insured mortgages simplifies renewals.
• Mortgage renewals are at an all-time high due to previous low rates.
• The government proposed removing the stress test for conventional mortgages, but it was short-lived.
• Lenders are advised to take a conservative approach regarding stress tests.
• Proposed refinance rules for secondary suites aim to tackle the housing crisis.
• Homeowners can refinance up to 90% of their property's value for secondary suites.
• Implementation of new rules may be slow due to logistical concerns.
• Staying in touch with mortgage professionals is crucial for accurate information.

Sound Bites

"We kind of take it back."
"It's frustrating to say the least."
"Thank you for lending me your ear."

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Podcast Produced and Distributed by AgentInnovationStudios.com

Creators and Guests

Host

Nicole Farrugia

Hi, I’m Nicole, the creator of the MortgageEase Method. I started this venture with a simple yet powerful vision in mind – to revolutionize the way we approach mortgages and financial education. Inspiration Behind the MortgageEase Method: What inspired the creation of MortgageEase? It was my deep desire for freedom – the freedom to run my business my way, prioritize people, and lead with education and sincerity. I identified an opportunity to break away from the norm and establish a space where individuality and genuine care come first.

What is MortgageEase Unfiltered: Beyond Rates & Real Estate?

MortgageEase Unfiltered: Beyond Rates and Real Estate is the podcast that goes beyond numbers and jargon, tackling the real issues around homeownership, mortgages, and personal finance. Hosted by Nicole, this show digs into the latest mortgage trends, offers down-to-earth financial advice, and explores the ups and downs of real life—from buying your first home to managing the curveballs life throws your way. With expert interviews and practical tips, MortgageEase Unfiltered is your go-to source for understanding how to navigate both the mortgage world and the challenges that come with it. Tune in, get informed, and join the conversation!

Nicole Farrugia - MortgageEase (00:17.644)
Hey everyone, Nicole Frugia here. Thanks for joining me on another episode of Mortgagee's Unfiltered. So in this episode, I'm gonna get right back into another sort of mortgage rule shakeup and talk to you about some rules that are now in effect or maybe not in effect anymore and that'll make more sense in a couple minutes when I start talking about this stuff.

But essentially on today's episode, I want to focus a little bit more on some of the rules that came into effect for the stress test adjustments for mortgage renewals and also some of the proposed rules for refinancing for secondary suites. we'll start with sort of the stress test adjustments for mortgage renewals. So right off the bat, I want to kind of just touch on what the stress test is. So

In simple terms, a stress test just basically ensures that households have enough flexibility in their budget to maintain mortgage affordability in any sort of unforeseen circumstances. currently, borrowers must qualify on the higher of the Bank of Canada benchmark, which is 5.25 % right now, or the contract rate, which is basically the mortgage rate that you get, plus 2%. So...

In all honesty, for the most part, because rates have been so high for the last little while, we as mortgage brokers or finance professionals have pretty much just been stress testing individuals or borrowers at that contract rate plus 2%. There's a couple sort of exceptions to that and we'll save that for another time. But in general, sort of that is what the stress test.

is. And so again, just kind of a quick, easy explanation. If you are coming to me as a client, and I am, you know, even if it's a purchase or what have you, whatever it may be, I have to basically pretend that your mortgage, let's just say mortgage rates are at four and half percent right now, for example, on a fixed, I have to pretend that your mortgage rate is 6.5 % in that example, for you know, stress testing purposes. So basically,

Nicole Farrugia - MortgageEase (02:22.5)
Now that we're kind of familiar with what the stress test is, one of the biggest things right now, or talks to the town right now, are mortgage renewals. And that's because since we saw these incredibly, pretty much lowest rates that we've ever seen in early COVID, we are now coming up to all of these sort of mortgage renewals. And we actually have the highest level of mortgage renewals coming up within the next 12 to 18 months that we have ever seen. So the nice thing is that

As of the last little while, we have had the removal of the stress test on insured mortgages. So if you listen to any of my previous episodes, I've talked about what an insured mortgage is. So that's still kind of in play and that removal of the stress test for insured mortgages still remains in effect and that has been in effect for a little while now. So just to kind of again, further clarify what that means.

If you are a client and you your mortgage was originally insured and you are looking to renew, then you are no longer going to have to have that stress test applied to your mortgage renewal qualification. And again, that insurance base has been around for a little while now. I want to just emphasize the fact that this does not or it will only be applicable to straightforward renewals. So what does that mean?

Well, if you are looking to keep your mortgage intact, let's just say for example, easy numbers, your mortgage is $500,000 and a client calls me, you know, it was originally insured and they haven't refinanced it or anything like that and they're just looking to find the best rate. They're not looking to restructure their mortgage. They're not looking to tap into, you know, equity to consolidate debt. They're not looking to do anything. They're just like, hey, my lender's giving me this. I want to find the best rate and I want to look elsewhere.

we no longer have to have the, or has been for some time now, but again, you no longer have to have that insured mortgage stress test at Renewal. So again, straightforward, fairly easy peasy. That is currently in effect and still remains in effect. But what happened is in November now, so November of 2024, the government announced that they were going to remove the stress test also for conventional mortgages. So mortgages that were uninsured.

Nicole Farrugia - MortgageEase (04:44.548)
And basically the other half of the pile, they were gonna, or they basically said, hey, we no longer have to stress test on the conventional mortgages either. So there was a lot of excitement around that. Myself as well, we were all like, okay, hey, this is very helpful because again, a big chunk of sort of the space that we work within for a lot of borrowers is that uninsured space.

So it was a lot of excitement again and what I just explained for you for the insured sort of rules is the exact same thing. It was just now applicable to uninsured mortgages. However, this is the big thing and nobody is really talking about this. So this is my biggest thing of wanting to do an episode on this right now. I found everybody was throwing it out there about, all the excitement around the removal of the stress test for the uninsured sort of renewals.

but nobody is talking about the fact that in December now, like literally a few weeks later, we basically started to get some information from our lender partners that basically said, hey, following the announcement the previous month from OFSI, which is the, what is it, Office of the Superintendent of Financial Institutions, I think, I probably should have looked that up before I did this, but the powers that be that sort of govern everything on the finance side of things,

They basically came around and said, hey, you know what? We kind of take it back. We feel like we should, you know, caution you guys and continue to advise you to take a more conservative approach. And so we're sort of basically suggesting that you should re-institute, so to speak, or just put the stress test back in place. And so we started to get some...

communication from our big banks and our lender partners that said, hey, yeah, following this announcement from Offsea, we take it back. We're no longer going to, or we're basically gonna be putting the stress test back in place. Again, this is only for the uninsured space. So the insured space is still all good to go. That's been removed and maintains and is still intact. But yes, it was very short-lived for the...

Nicole Farrugia - MortgageEase (06:58.914)
that insurance space. And again, lot of the majority of the lenders now have basically said, okay, hey, you know, this is what we're basically implementing this all over again. So there's a period of time of those few weeks that we call them in-flight applications. Those will be sort of, you know, grandfathered and nothing's gonna happen with those ones. But basically, you know, after that timeframe, then lenders are basically kicking them back and saying, no, like, we're not adopting this anymore. So.

It's frustrating to say the least. And I just wanna really emphasize the fact that this is again why it's so important to make sure that if you're a consumer of a mortgage and reaching out to a mortgage professional or mortgage broker, whoever it may be, if you're a realtor, it's the same thing because if you are...

advertising this kind of information and throwing it out there. And it's a great thing because you want to keep your clients as informed as possible. Maybe it's a good idea to just kind of check with your mortgage professional or whoever it may be that you're working with just to kind of fact check these things beforehand because we can keep you up to speed with sort of what we're seeing. so, it's just, yes, the mortgage landscape is changing on a regular basis. So it's important that we kind of are always staying in touch with these things.

And so that kind of, you know, pertains specifically to mortgage rules and I'm sorry, mortgage renewals rather. And, you know, that was kind of the latter half for the last two months of 2024. And now fast forwarding back into this year, we also saw a lot of, actually shouldn't even say a lot of information because there wasn't as much about this, but it is known that in January or on January 15th rather,

we saw that the, again, that the federal government, the powers that be, basically sort of implemented or rather, or suggested that there was proposed refinance rules for secondary suites. And the whole purpose of this is for basically homeowners, so the key thing is homeowners, so you have to already own your home, to be able to tap into equity to construct a secondary.

Nicole Farrugia - MortgageEase (09:13.374)
suite and they can do that refinance for up to 90 % of the property's values. Now, this is sort of measures from the government to find a way to start tackling the housing crisis, we'll just call it. I'm gonna reserve my comments and my thoughts on that for another episode and focus on the rule at hand, but that's kind of sort of why they're proposing these things. And sort of the key parameters,

to be sort of eligible for this potential or proposed sort of refinance is that the borrowers need to actually occupy the home. again, it has to, you have to be a homeowner or at least like, know, close relative or what have you, but it basically has to be an owner occupied home. The additional units cannot be used for short-term rental. So it was very loud and clear that this can't be something you're doing to like, know, Airbnb for example. And they also must be,

I don't want to use the word legal units, but they basically at least must be fully sort of self-contained and meet the, we'll call it the municipal zoning sort of requirements. And so on top of that, the maximum units were four, well, like three, including the one that you're going to be occupying, so four in total. And then the overall maximum property value, or we'll call it the as improved value,

cannot be or cannot exceed $2 million. So that was kind of the parameters that came out. And again, I wanna say that this is an insured sort of space as well or product anyway. But one of the biggest things and the reason why I wanted to talk about this right now is because again, I saw some excitement around it. I heard people talking about it. I got some calls and some questions from even some of my real estate teams that wanted to talk about this, what their database.

And as much as that is technically sort of in effect right now, because it came into that the proposed guidelines came out into effect in January of this year, January 15th, we have seen that majority of our lenders, and this includes the big banks and things like that, have opted not to adopt this rule yet anyway. And so, if and when they do, implementation is likely to be very slow.

Nicole Farrugia - MortgageEase (11:38.398)
And a lot of that has to do with even just things like logistical sort of concerns. And what I mean by that is we have to understand that, like let's look at the big banks, for example. These are massive financial institutions that have so many different pieces of compliance rules. something like this, logistically to be able to, for their systems to actually physically take in these applications and things like that, it is a lot of work. And so,

I've talked about this before, I think, previously in other episodes, but, you know, a lot of times we, as mortgage professionals or finance professionals, we find out about these rules, like, literally the same, or proposed rules, I should say, literally the same way that you guys do. And what I mean by that is, like, it's a press release that, you know, that the federal government puts out, for example, or whoever it is, puts it out, and the same way that you guys might be reading it, or it might be an email that lands in your inbox,

is the same way that we get notification and also the same way that the lenders get notification of these things. So just because something is being sort of proposed, doesn't mean that it's going to be adopted. Excuse me. It doesn't mean that it's going to be adopted. you know, there's likely a lot more that goes on behind the scenes. And so something like this, for example, this is also

taking time for lenders to digest whether or not they're comfortable with the overall risk of this. Like being able to refinance your property and go up to sort of 90 % owned value and things like that. That's something that, and for secondary suites and things like that, because that's what this is catered towards, lenders still need to have time to really even think about like before we put in all the effort for sort of the logistical pieces of it, do we want to get behind this?

Do we think that this is going to be, in full transparency, profitable enough for us and that we wanna start making all these tweaks to be able to allow us to actually take in these applications? So all of that being said, the thing I want to emphasize here is that although this is a proposed rule, as it stands as of today, a lot of, majority of lenders have opted not to do this. And so,

Nicole Farrugia - MortgageEase (14:01.732)
I've had calls on this and it's like, okay, hey, well, there's really only a handful of lenders that might be doing this right now. And so again, going back to my previous point that it is so important for you to stay in touch with your finance professionals. And for any of the realtors listening to this, for example, if you wanna share this information with your database, that is great because the whole reason why I'm sharing this information is for people to learn. it's a great thing, but again, just potentially.

give your professionals a call and just kind of fact check things to make sure because you can still put that information out there but maybe the delivery of it is exactly what I am saying to you guys right now in that the mortgage landscape is always changing and so it is really important to make sure that things are relevant when you're putting it out there. And I will just kind of go on record today to say.

that everything I'm giving you right now is effective as of today and it's the information that we have on top for today, but it could very well change in the coming weeks or the coming months. like speaking with these exact rules, maybe there will be some more adoption later on, but it could very well take quite a bit of time. And so I will leave it at that and just basically kind of, again, really emphasize to you guys to get in contact with your

professionals just to make sure that you know, it's our job to stay on top of these things that we can then you know, kind of reiterate that information to you. So it's a matter of giving your professionals a quick call, quick email just to kind of check and say, hey, you know, what's the scoop? What's the deal? Is this still the case? And you know, how can I sort of present this information out there? So that's it. I think for this episode, guys, I want to keep it short and sweet and you know, just give you the relevant information. So that's a wrap. Thank you for lending me your ear.

The next episode is almost near.