The new stress test level makes it harder to qualify for a mortgage in Canada
It is a little harder to qualify for a home loan today as the government has increased the minimum funding limit that anyone applying for a mortgage must meet.
Ottawa today raised the level of its so-called “stress test” on mortgages, setting the new level at 5.25 percent – or two full percentage points above the borrower’s mortgage rate, whichever is higher. That is an increase of about half a percentage point compared to the previous level.
The stress test was introduced in 2017 to cool the then overheated market. It is a minimum threshold that anyone applying for a home loan in Canada must meet. This does not make the loan itself more expensive. Rather, it ensures that anyone who gets a mortgage can repay it when interest rates rise.
It’s not difficult right now to find a five-year fixed-rate mortgage with an interest rate of around two percent, with adjustable-rate loans being even cheaper and fixed-rate loans a bit more.
Despite these low rates, a look at the numbers shows how big the impact the higher stress test bar could be. Currently, if a buyer wanted to buy a home for $ 400,000 and had a down payment of $ 100,000, they would need a $ 300,000 mortgage. At two percent on a standard 25 year loan, that would cost the buyer $ 1,270 per month. However, under the new rules, the mortgage application would be examined as if the interest rate were 5.25 percent. At that level, the loan would cost the buyer over 40 percent more each month – $ 1,788.
While this higher payment is only theoretical, the lender would not be able to lend them the money if the buyer were unable to pay that additional $ 518 per month based on income level, total debt burden, and other factors. Those buyers would then have to find a cheaper home to pass the test. The effect on the market as a whole is to reduce the pool of qualified borrowers in hopes of the market cooling off.
The stress test isn’t going into effect until today, but there are already signs that the market is cooling off even before it’s implemented, says James Laird, co-founder of the rate comparison website Ratehub.ca.
“That doesn’t mean the real estate market is slow, it’s just slower than it was in March this year,” he said in an interview. “Regardless of this rule change, March 2021 will likely be the high point.”
Canada’s real estate market closed a year like no other in March 2021, as that month marked the first 12 month period to mark the start of the pandemic when home sales slowed to a minimum due to uncertainty. But through the spring, summer, and well into the fall, demand from Canadians settled at home under various COVID-related quarantine lockdowns sparked a fire under the property market, sending volumes and prices soaring for the remainder of 2020 and this year .
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The average price of a Canadian home sold in March was $ 716,828, a value that rose more than 30 percent in a year. That was the largest annual increase on record.
April is usually a stronger month for home sales than March, but Laird said the markets came back down a bit in April 2021. Prices were still up sharply year over year, but markets slowed as talks focused on what policymakers should do to cool the property market.
“We saw some of the foam coming off the market that we saw earlier this year,” he said.
The stress test should cool things down even further and, according to Laird, reduce purchasing power by an average of around five percent. And, he says, while potential buyers may grumble about the exclusion, if house prices come down, it could be good news for everyone in the long run.
“What policymakers had in mind was to slow the rapid appreciation of residential values that we are seeing across the country.” he said. “In the long run, it may make it easier for first-time home buyers to enter. [so] maybe you could call it neutral. “
That is certainly Neil Pettit’s perspective on the subject. Pettit and his fiancée Amanda Garant are looking for a home in Windsor, Ontario, where they live. But they’re currently sitting on the sidelines after losing multiple bidding wars – despite being way above price each time.
“We’re losing bids by $ 100,000,” he said in an interview. “I mean there is no way.”
Both have healthy incomes and have saved a good down payment. They said the new stress test is unlikely to affect them. Nonetheless, they are happy to see the government intervene.
“You may not find yourself in a house that you can afford once the rate hike goes up,” Pettit said. “From my point of view, it makes sense for the government to pull this lever a little.”
While the couple are still looking to buy, they are in no rush to do so. And after surviving a feverish house hunt and falling short, they are confident that they will not get over their heads.
“We are very careful in the search to make sure it is within our budget,” said Pettit. “Not the budget that the bank said we could afford.”