November 20, 2019

New Mortgage Stress Test – Buyer Issues with Mortgage Financing

BUYER ISSUES WITH MORTGAGE FINANCING

With Canadians taking on ever bigger mortgages, the Federal Government introduced new “Stress Test” mortgage rules in 2018.  In addition to financially qualifying for your mortgage now, you must also qualify for the amount of your mortgage based on the five year mortgage rate +2%.  The concern of the Federal Government being if you cannot qualify to carry the mortgage in five years there will be many foreclosures and it will have a significant negative impact on home values.

The effect on buyers of real estate was immediate.  Many who expected to have no trouble qualifying for mortgage financing ran into problems.  A typical scenario saw a buyer being advised shortly before their closing that there mortgage had not been approved.

The Stress Test rules apply to all six of Canada’s chartered banks.  It does not apply to credit unions and other lenders, although some of them are also following the Stress Test rules.

If you are a Seller and shortly before your transaction is scheduled to close the buyer runs into problems, they will likely ask for an extension of closing.  You have options in this scenario:

  1. you can agree to the extension on appropriate terms;
  2. you can refuse the extension and consider one of the following:
    • treat the transaction as being at an end and go after the buyer’s deposit.  If the buyer does not agree to release the deposit to you, you will have to start a Court action; or
    • tell the Buyer that the transaction is at an end because they are in “Anticipatory Breach” of the Agreement of Purchase and Sale (meaning they have told you they cannot close), but so long as they are able to close by a designated date, cover your carrying costs and whatever additional fees etc. you think appropriate you will allow the transaction to be resurrected.

Some lawyers prefer the approach in 2(b).  If you agree to an extension and the Buyer is never able to get their financing, they may try to find some other way to terminate the deal without being exposed to a potential claim.  The approach in 2(b) means the Buyer remains exposed to a potential claim and if they should fail to complete the transaction on the date specified the house can be put back on the market promptly.

If you are representing yourself on a real estate transaction, it is critical that you obtain advice from an experienced real estate lawyer before considering these options. 

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