Mortgage ‘Stress Test’ Implications on Homebuyers
In Canada, about 700,000 homes are purchased annually, of these, 625,000 to 650,000 will require financing, while just over 1 million homeowners will renew their mortgages – all who will have to undergo a new test. From January 1st of this year, Canadians were introduced to numerous new rules* relating to real estate homebuyers. One of them applying to anyone getting, renewing, or refinancing a mortgage, who now have to undergo a ‘stress test’. Ultimately, proving that they would be financially stable if interest rates were to rise 2 percentage points above their current mortgage rate.
What does this mean for homebuyers? Simply put, this means homebuyers will have to pass a stringent qualification test that suggests you use the rule of thumb where the mortgage is no larger than 4x of your annual income. Our top 3 weekly editorial picks will explore the implications of the stress test.
The article by Global News, “Could you pass the mortgage stress test? Here’s how to find out” outlines that the biggest impact of the test is many will not be able to borrow as much as before. Many people hoping to purchase the homes they would like would not be able to qualify, and thus have to settle for a less-expensive or smaller house. For individuals wanting to renew or refinance their mortgage, they may be forced to stay with the current lender or not be able to borrow more against their equity.
Now, many homeowners may be worried about what they need to qualify for a mortgage. This Global News article, “Here’s the income you need to pass the mortgage stress test across Canada” summarizes the expectations of getting a mortgage after the new rules. One of the most important challenges is to be able to demonstrate that you are able to pay your bills even if the mortgage rate increases by an additional 2%.
The article indicates that the expected income to pass the stress test in Toronto is $145,000, with an average of a 20% down payment of $163,528 on a house worth around $817,642 – assuming the individual has no other debt. This is based on a five-year fixed mortgage rate of 2.99%, and using the rule of thumb to buy a house where the mortgage is no larger than 4x their annual income.
Finally, since the implication of the stress test, it is important to know how it is impacted the overall interest rate. The interested rate has seen a hike up to 5.34% by May, going up 5 times since May 2017. This article, “Bank of Canada’s mortgage ‘stress test’ rate climbs higher”, also mentions how Canadians will pay more per month for their mortgage, putting a substantial pressure on first time homebuyers who have more limitations now.
* To read more about the seven mortgage policy changes, read Mortgage Professionals Canada’s official annual report for 2017.