Note: This post was edited on July 22, 2019 to update the Stress Test rules that changed with the Bank of Canada’s rate drop.
It’s official. The Federal Government’s proposed changes that will tighten mortgage qualification lending rules (Guideline B-20) are set to take effect as of January 1st, 2018.
The change will require homebuyers to face a stress test and qualify for a mortgage based on the Bank of Canada’s benchmark rate (currently 5.19%) or 2% higher than the negotiated rate (whichever is larger) to ensure that they would be able to handle their mortgage payments should interest rates continue to rise.
Anyone with insured mortgages, which are those making a down payment of less than 20%, must face a stress test and qualify for a mortgage based on the Bank of Canada’s benchmark rate (currently 5.19%) or the actual rate offered by your lender without adding the extra two percentage points.
What The New Canadian Mortgage Rules Mean For Would-Be Buyers
As of January 1, 2018 Buyers will be able to afford less than they could today. Think about it like this: if interest rates rose another 2%, how would this affect the amount of home you could purchase? Obviously, you would be on a bit of a tighter budget.
Take this example below.
Allison wants to purchase a property. Her bank say she’s looking at a mortgage rate of 3% — this means she will need to qualify at 5% under the new Stress Test.
In 2017 at a 3.13% rate with an $80,000 down payment, Allison could afford to borrow approximately $420,000. However, as soon as she crosses that threshold into 2018, Allison can only afford to borrow $358,000 with her down payment and the 5.13% Stress Test rate.
What This Means For A Firm Purchase That Closes in 2018
If you’ve purchased a property firm with an Agreement of Purchase and Sale dated in 2017 that closes in 2018 (without any conditions) you will likely not be affected. You should however check with your bank to be sure.
What This Means For A Conditional Purchase That Closes in 2018
If you’ve purchased a property firm with an Agreement of Purchase and Sale dated in 2017 that closes in 2018 with conditions, you will need to re-qualify. If this is you, you will definitely want to check with your bank ASAP.
What This Means for Purchasers with Pre-Approved Mortgages
A pre-approved mortgage is not an Agreement of Purchase and Sale nor a guarantee of a mortgage itself. As such, if you have a pre-approved mortgage that is good well into 2018, you will be required to re-qualify at the new Stress Test rate.
Tightened Lending Rules Will Hit First Time Buyers the Hardest
The government has released a number of initiatives with the intentions of cooling the booming Toronto housing market with the ultimate goal of making homes more affordable — especially for would be first-time buyers. However, It seems that those who will be the most greatly affected are those who the fair housing initiatives were designed to help.
First-time homebuyers are the most price conscious buyers, typically with a smaller down payment and this new Stress Test will effectively lower their buying power the most. It may not be a competitive market as far as 2016 is compared, but the real estate market in Toronto is still holding strong and it’s still competitive. Buyers will be able to afford less house, therefore effectively lowering their position to compete in the market. It is possible that a number of these buyers could be completely side-lined. While those at the top-end of the market will remain basically unaffected.
How You Can Personally Combat These Changes For Your Home Purchase
Simply put, our best advice for first-time home buyers in Toronto to combat these changes is to get ahead of them and purchase your home before January 2018 to take advantage of the current rates (possibly) without the Stress Test. We say possibly, because it is possible that Brokers are “Stress Testing” already behind the scenes.
It should also be said that just because you CAN afford a $1MM property at the top of your budget, doesn’t mean you SHOULD purchase that $1MM property. It’s not always wise to fully extend yourself.
However, if you’re a buyer who has been struggling to get into the market and this new Stress Test threatens to take you out of it completely or stops you from purchasing exactly what you are looking for then you want to consider purchasing firm in 2017.
Everyone’s personal finance situation is different, talk to your mortgage broker (or ask us for a great referral) today to discuss the approach that will fit you and your finances best. If you’re thinking about buying you definitely want to read our guide, “Buying in Toronto’s Changing Market”.