The changes to the mortgage stress test officially came into effect on June 1 in Canada. Originally announced back in April by the Office of the Superintendent of Financial Institutions (OFSI), these new rules affect both uninsured and insured mortgages.
Many people might not be fully aware how, or if, the stress test impacts them. However, it’s a good idea to be refreshed on these rules and what they represent in today’s real estate market. What do these changes mean, and how might they affect future homebuyers?
Changes to the stress test
Up until June 1, the stress test level sat at 4.79%. This meant borrowers had to prove the ability to make their mortgage payments at this hypothetical interest rate. The stress test exists to ensure borrowers can afford their mortgage payments even in the event of a prime rate increase.
Now, the stress test level has jumped to 5.25%, or 2% above the buyer’s mortgage contract rate. The higher number between those two situations will be the one that dominates. Buyers now have to prove they can make their mortgage payments at a slightly higher rate than before. This rise was introduced as a tactic to cool down the hot housing market created, in part, by COVID-19. The idea was to increase the stress test level to reduce housing demand by limiting borrowing power.
How do these changes impact borrowers?
When the stress test was introduced in 2018, it only applied to high-ratio mortgages. These were mortgages with down payments below 20% that required Canada Mortgage and Housing Corporation (CMHC) insurance. Now, these new changes impact both insured and uninsured mortgages (mortgages with a down payment over 20%). All borrowers will have to qualify for their mortgage at this 5.25% rate, which is higher and therefore slightly more difficult to achieve than the previous 4.79%. This may affect how much a borrower qualifies for when they apply for their mortgage. An estimated 4.5% drop in buyers’ borrowing power is expected to take place along with these new rules. For example, it would mean, on average, borrowers who once qualified for a $400,000 mortgage would now only qualify for a mortgage of $382,000.
What about people in the middle of the homebuying process? These changes impact buyers in this situation too. Buyers with active pre-approvals will need a review to confirm their borrowing power if they did not buy a home before June 1.
Let a broker be your guide!
There have been several questions about whether or not this change is sufficient to make a difference in the hot real estate market. Some say the measures go too far and are only preventing new homebuyers from entering the market. Others believe the measures aren’t strong enough to have a significant impact on cooling the market down.
For you as a buyer, these rules leave you with new considerations no matter what. That’s why it’s important to use an unbiased mortgage professional to guide you through these changes and what they mean for you. A mortgage broker can help you understand your options and see how your borrowing power might be affected moving forward. Changes happen frequently in this industry, but a broker can help you see if they’re relevant to your situation.
These new rules may be causing you some stress, but they don’t mean you can’t buy a home. If you have any questions about the new stress test rules or securing a mortgage, you can always reach out to Clinton Wilkins Mortgage Team! Get in touch with them at (902) 482-2770 or contact them here.