COVID-19 tragically swept across Canada last year. It sadly changed many aspects of our lives. One of the areas that we did not anticipate was the impact on the residential real estate market. We have witnessed an unprecedented roller-coaster in-home sale in Ottawa.
The Federal Government has been concerned about the rising prices of homes across Canada. The fear has been that as debt levels have increased, homeowners may be more vulnerable when mortgage rates eventually increase. In addition, as inflation is rising, the costs of food, fuel and household expense are increasing. This will leave families with less money available to pay their mortgages.
Canada’s booming real estate market has pushed the Government regulator to increase the Stress Test. First introduced in Canada in 2018, the mortgage Stress Test for insured mortgages requires lenders to check that mortgage applicants could still make payments based on the higher of the Bank of Canada’s qualifying rate.
To complete a Stress Test, mortgage lenders calculate the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to determine if applicants have an income high enough and debt low enough to make mortgage payments based on the higher should rates increase. When your down payment is less than 20% of the purchase price, you will need an insured mortgage. That is when the mortgage stress test comes into play. It is important to understand that these new mortgage rules only apply to CMHC insured mortgages.
The Office of the Superintendent of Financial Institutions (OSFI) revised the Mortgage Stress Test, effective July 1, 2020. The OSFI stated that the new qualifying rate for uninsured mortgages “ensures that the financial system is adequately prepared for the possibility of a return to pre-pandemic economic conditions.” They want to ensure that borrowers can make their payments if the market returns to normal. To pass the Test, mortgage owners need to prove that they can qualify at either their contracted mortgage rate plus 2% or at the Bank of Canada’s five-year benchmark rate of 5.25%, whichever is higher.
If you buy a house at $500,000, plan a 20% down payment ($60,000), and receive a rate of 3.8%, your monthly interest rate will be $1,401.63. You need to prove you can pay 5.2.5% or $2,492.15 a month. Check out the Financial Consumer Agency of Canada Mortgage Qualifier Tool to calculate your amounts https://itools-ioutils.fcac-acfc.gc.ca/MQ-HQ/MQ-EAPH-eng.aspx
The new Stress Test rules will make purchasing homes slightly more of a challenge for some first-time homebuyers. Most home buyers will not see a significant impact. When you are considering your mortgage options, always discuss your situation with your Royal Lepage Agent. Depending on your circumstances, you will want to review your household budget. Reducing discretionary spending or paying off debt may be a good idea. In addition, you may need to reduce your budget and pay off other debt to prove to your lender that you can afford the new mortgage.
Talk to your financial institution about lowering your monthly debt payments through debt consolidation to improve your TDS ratio, and always check your credit score. Also, consider looking at lower-priced homes with a smaller mortgage and therefore reducing your GDS ratio. Asking family members for financial help may be an option for some purchasers. By taking steps now to strengthen your mortgage application, you will improve your chances of getting a mortgage approved and improve your overall financial health.
The impact of the Stress Test will primarily affect first-time homeowners. Purchasing a home for the first time can be challenging at best. Learn as much as you can about the new provisions of the Stress Test. Then consult with your Royal Lepage Team Agent and your lender. Always consider paying off current debt or discussing options with family members and check your credit score. With careful planning, the changes to the Stress Test should not significantly reduce your opportunity of homeownership and making your dream come true.