Note: This post was edited on July 22, 2019 to update the Mortgage Stress Test rules that changed with the Bank of Canada’s rate drop.
CANADA’S NEW MORTGAGE STRESS TEST IN 2019
It’s been a year and a half since the Canadian government implemented their new mortgage qualification guidelines, otherwise known as the new Mortgage Stress Test. Under these new guidelines homebuyers must qualify for a mortgage at a rate of 5.19% (down from 5.34% in July 2019) or 2% higher than the negotiated rate, whichever is larger.
This stricter qualification process has made it increasingly difficult for first-time homebuyers to get into the Canadian real estate market — meaning they can afford far less than they could two years ago. With their budgets suddenly dropping and their ability to afford a Toronto house gone, buyers are now turning to condos as the more affordable option. This, in turn, has inflated the demand for condos and sent Toronto condo prices soaring.
Since the new Mortgage Stress Test for Canada was implemented in January 2018, the average condo price in the City of Toronto has jumped 17% to $636,606 from $543,279. The government’s efforts to stabilize the housing market and reduce borrower debt has had some unfortunate consequences. In fact, contrary to their efforts, if you look at the data in Toronto’s condo market, these changes have had the opposite effect and have hindered the one house type that was within reach of many first-time buyers.
MORTGAGE STRESS TEST 2019 CALCULATOR FOR CANADA
If you’re a first-time buyer asking yourself how to avoid the mortgage stress test, the truth is you can’t. Instead, get curious and start finding out what you can afford under today’s lending policies, use our Mortgage Stress Test Calculator to see if you could pass the mortgage stress test. Simply enter the purchase price of a home, select you amortization period, and enter the custom interest rate of 5.19% to see what your monthly payments could be under the mortgage stress test.
Learn how you can save with these first time home-buyer rebates
MORTGAGE RENEWALS POST-STRESS TEST
Canada’s new mortgage stress test isn’t just affecting first-time buyers, it’s also having an impact on homeowners who are set to renew their mortgages. Homeowners who are approaching the end of their term will also have to undergo a stress test when they go to renew or if they want to change lenders. If you can’t pass the stress test you’ll be forced to stay with your current lender who no longer has to give you a competitive rate.
While the rate drop is the first good news after a series of rate hikes since July 2017, if you’re up for renewal you may want to consider a variable-rate mortgage. This Global News article from 2018 came out after the series of rate hikes we experienced prior to this slight drop and makes the claim that “variable-rate mortgages are once again looking pretty attractive, according to mortgage brokers. This may seem counterintuitive after a year of interest rate increases. But after Wednesday’s rate increase… the [Bank of Canada] likely won’t have that much further to go”. And, now we can confirm in 2019 that in fact they didn’t with this month’s rate-drop bringing the new stress rate to 5.19%.
Another thing to be wary of is the new accounting rules, IFRS 9 (International Financial Reporting Standard). In a nutshell, the banks are now doing soft credit checks to look for early warning signs that their borrowers may struggle to maintain mortgage payments.
For instance, if your credit score has gone down even though you’ve never defaulted on your mortgage, this could impact your mortgage rate when it comes time to renew. The founder of RateSpy.com told the Globe and Mail that he’s “been told by some bank executives that mortgage rates for people whose financial position has slipped might be 0.05 to 0.15 of a percentage point higher, which is fairly insignificant.”
If you’re approaching your mortgage renewal you should speak with your mortgage broker sooner than later to start discussing your options. Do your research and ensure you’re well informed on the market and what they believe the coming months will bring.