Overview: a look at the new mortgage stress test and its impact on Toronto’s housing market, including home sales, prices, mortgages, buying power and more.
Starting June 1st, the federal government is updating its stress test and making it tougher.
To cool down the country’s red-hot real estate market and make it harder to buy a home.
Just what does the new stress test entail?
And how will those changes impact home prices, mortgages and your ability to buy real estate?
Let’s find out…
What Is The Mortgage Stress Test?
The original stress test was created back in 2018 by the Office of the Superintendent of Financial Institutions (OFSI).
Its purpose was simple: to make sure homebuyers were spending within their means.
The stress-test helps to determine if borrowers will be able to afford their mortgages even if rates rise.
When someone applies for a mortgage, they’re given a “contracted interest rate.”
This is the “real rate” of their monthly mortgage payments (i.e. what they’ll actually pay).
However, the stress test requires buyers to qualify at a higher “theoretical rate.”
To make sure they can still afford their monthly payments should interest rates suddenly go up.
For homes that require a down payment of 20% or more, this rate is based on the Bank of Canada’s 5-year benchmark rate plus 2% (whichever is higher).
For homes that require a down payment of less than 20%, this rate is based on the higher of the BoC’s 5-year benchmark rate.
Now that we know what the stress test is and why it was created, let’s examine the proposed changes.
The New Mortgage Stress Test
It will set the qualifying rate on uninsured mortgages at either 2% above the contract rate or 5.25%, whichever is higher.
That’s up from the current qualifying rate of 4.79%.
But the rules also apply to insured mortgages and anyone looking to refinance their home.
According to Global News:
The federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages…which will be the greater of the borrower’s mortgage contract rate plus 2 per cent, or 5.25 per cent.
The reason behind the harsher stress test is the same as before: to cool an over-heated housing market.
CTV News informs:
The change is aimed at taking the heat off real estate markets like Toronto and Vancouver, where bidding wars, soaring prices and a flurry of sales were the norm during the COVID-19 pandemic.
So how exactly will the new stress test affect homebuyers?
Impacts Of The New Mortgage Stress Test
According to RateHub:
In the near term, this change will make it more difficult for homebuyers to qualify for a mortgage. At all income levels, this change reduces the amount of mortgage a household can qualify for…
So the new stress test will make it harder to qualify for a mortgage, as well as the amount people can qualify for.
The new rules will be especially hard on first-time homebuyers.
Global News reports:
…first-time homebuyers in particular are likely going to be impacted the most from the new rules because they’re likely to not have as much equity as those who’ve already purchased a home…
The updated stress test will also lower a buyer’s purchasing power.
The higher minimum stress test is expected to cut maximum buying power by between 4% and 4.5%. For a median-income household, that would reduce the maximum purchase price from $442,000 to $422,000…
On the other hand, the effects won’t be as dramatic as back in 2018, which lowered the purchasing power of households by 22%!
In fact, there’s actually an upside to having less purchasing power.
As Rates.ca explains:
Obviously, [the stress test] cuts buying power, but that also means fewer people will be able to bid as much for homes, reducing some price pressure.
Because of the stress test, serious buyers will face less competition and lower home prices!
Advice For Home Buyers
First, if you’re house hunting make sure to get your mortgage pre-approved to qualify under the old rate.
Canadians currently shopping for a home should ensure that they have a pre-approval, as OSFI is allowing lenders to grandfather the current stress test rate for those that have a pre-approval prior to June 1st.
Grandfathered basically means that you can get approved under the old rules instead of the new, more stringent ones.
Second, if you’ve already bought a home, try to obtain a mortgage approval before June 1st.
CTV News advises:
For anyone who purchased a home already, it would be a good idea to obtain mortgage approval prior to June 1 as that should allow you to qualify under the current conditions.
Finally, anyone who already owns a home and is looking to refinance should do so before the June 1st deadline.
Yes, the new stress test will make it harder to qualify for a mortgage.
And yes, it will reduce a buyer’s purchasing power by almost 5%.
But it will also reduce competition and lead to lower prices.
While the very idea of a stress test sounds scary, experts believe it will have very little impact on home sales.
As The Motley Fool points out:
The rate hike for the stress test isn’t drastic. So, it might not do much in cooling off the Canadian housing market.
Want to know more about the new stress test? Contact me below for details.
Real Estate Broker
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