Let’s break it down from a financial standpoint, a stress test is just how it sounds. It’s designed to test how your finances might be affected by experiencing economic turmoil, such as losing employment or going through a divorce. Plainly speaking, the mortgage stress test forces the potential buyer to come face-to-face with the remarkably high costs of being a homeowner. All potential Canadian homeowners will need to prove they can afford their prospective mortgages based on their lender’s minimum “qualifying rate.”
In Effect June 1st
The new mortgage stress rules came into effect on June 1, 2021. The qualifying rate on uninsured mortgages is set at either two percentage points above the contract rate, or 5.25 percent, whichever is greater.
The Office of the Superintendent of Financial Institutions (OSFI) announced the changes early in May, which was in response to an overheated market that has already started to see signs of cooling. Prices in the market have begun to stall. According to the Toronto Regional Real Estate Board, the average selling price for the Greater Toronto Area was $1,090,992 in April, down slightly from $1,097,655 the previous month.
This update in the mortgage stress test rule impacts all Canadian home buyers renewing a mortgage or applying for one. It does not matter what your income is; this new rule affects everyone. This move to implement tougher stress tests will reduce borrowers’ potential buying power by a little over four percent. Also once the pandemic alleviates, an increase in immigration will create more demand, placing added pressure on the market and making alternatives like renting more attractive.
Mortgage Stress Test Example
Let’s assume a home buyer with a household income of $100,000 has a down payment of $100,000. The potential buyer might have been able to roughly afford a $463,500 home, based on a mortgage rate of 2.23% and a previous qualifying rate of 4.79%. However, with the new qualifying rate of 5.25% and the same mortgage rate, the maximum home price the potential buyer could afford is now reduced to around $447,000 roughly 4% lower. To afford the same home as before under the new stress test rules, the potential home buyer would need to make up the difference by adding $16,000 to their down payment.
What the future holds for you?
While it may be hard to predict this new stress test’s outcomes, the tightening of government policy is always a hit to the market sentiments. Getting a mortgage approved with a hefty down payment can be challenging. Don’t let this discourage you from entering the real estate market. Another smart option are Canadian private REITs which have grown and provided many Canadians with exposure to real estate and a secure income. Let Equiton show you a more innovative way to invest in Canadian real estate with private REITs. Our experienced leadership team knows how to find and build wealth in real estate and record exceptional results. Our private REITs offer diversification, stability and help grow your portfolio.
If you want to learn more about Equiton’s private REITs, contact us at email@example.com or sign-up for our next upcoming webinar.