Applying and qualifying for a mortgage can be challenging for those wanting to purchase a home. In 2018, a mortgage stress test was introduced for all Canadian home buyers – even if you make a down payment of 20% or more on a house. There are new mortgage stress test rules to ensure that Canadians can afford their mortgages if interest rates were to go up.
On June 1st, 2021, the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance introduced new mortgage stress test rules that will impact homebuyers and owners. If you are looking to buy a home in the future you will need to know all about the new mortgage stress test. In order to qualify for a mortgage from a bank, you’ll need to pass the stress test.
What is a stress test?
A mortgage stress test is a way to determine exactly how much you can afford and under what circumstances. For example, if you lost your job, could you still afford to make the mortgage payments? It will ensure Canadian homebuyers can afford the monthly cost when applying for a mortgage even if interest rates increase in the future. Canadian Real Estate is growing at an unprecedented rate, with Vancouver and Toronto being named in the top 10 most expensive cities for housing in the world, and so it is important for homebuyers to know if that if interest rates continue to rise that they can still afford to pay their mortgage.
Since 2018, all Canadian homebuyers that were getting a high-ratio mortgage were subject to a mortgage stress test – this test now applies to ALL mortgages. When you apply for a mortgage, the bank will offer you an interest rate based on your credit score. The interest rate you receive is not the rate the bank will use to determine your mortgage eligibility. Instead, you will have to qualify on a considerably higher interest rate, to ensure you’ll be able to make your payments if they increase.
June 2021 – New Changes
Starting June 1st, 2021, with the new mortgage stress test rules, all insured and uninsured mortgages must be approved at a higher qualifying rate. Uninsured mortgages where borrowers have a down payment of at least 20%, and insured mortgages where borrowers have a below 20% down payment, will have to qualify for 5.25% or two percent more than the current rate, whichever is higher. The minimum qualifying rate has changed from 4.79% to 5.25%.
This means that your income needs to be high enough, and your debt low enough, to be able to qualify for a mortgage at that higher rate. Essentially, this will result in homebuyers being able to borrow a smaller amount of money from the bank.
As an example, if a buyer wanted to purchase a home for $400,000 and had a $100,000 down payment, they’d need a $300,000 mortgage. At 2% on a standard 25-year loan, that would cost the buyer $1,270 a month. But under the new rules, the mortgage application would be tested as though the rate was 5.25%. At that level, the loan would cost the buyer over 40% more every month — $1,788.
Across Canada, the average price of a home is up 31% since this time last year, and everyone is concerned. Tiff Macklem, Governor of the Bank of Canada, says “The biggest domestic vulnerabilities are those linked to imbalances in the housing market and high household indebtedness.” One potential solution to this is to take steam out of the market by making it harder to get in. With the new stress test conditions, Buyers will now have to prove they can make mortgage payments at an interest rate much higher, regardless of how low their actual mortgage rate really is. It reduces what you can afford, especially for first-time homebuyers.
What does this mean for homebuyers?
The new stress test will affect first-time homebuyers more than others because they don’t have equity built up in a home yet that they can use on a down payment. Already have a mortgage? If you refinance or renew your mortgage you will have to go through the new mortgage stress test as well.
If you’re interested in buying a home, the new mortgage rules will have a direct effect on how much of a loan you can afford. You have to prove that you can still make your monthly mortgage payments if interest rates were to rise in the future. Canada’s new mortgage stress test isn’t just affecting first-time homebuyers, it’s also having an impact on homeowners who are set to renew their mortgages. Homeowners who are looking to renew or if they want to change lenders will also have to undergo a stress test.
The new mortgage stress test rules will hopefully help relax the Real Estate market as it is increasing at an unprecedented rate. While interest rates are currently at record lows as a result of the pandemic, they’re not guaranteed to stay that way over the long term. In addition to cooling demand, this additional stress test will protect buyers who may struggle to make their mortgage payments if interest rates were to increase in the future. If you are looking to buy a home in Toronto, use our mortgage calculator today to see how much you can afford.