New Canadian Mortgage Stress Test
More than a year into the pandemic and we are all adjusting to new ways of living. Those line-ups at the grocery store are even more tedious, we now have to wear surgical masks at the office, and it seems every meeting takes place in a virtual space these days. However, some adjustments haven’t been entirely bad. Remote working opportunities are positive depending on what your lifestyle is like, people are spending more time with families, and there is a greater appreciation for frontline workers.
There have also been some positives in the real estate market depending on what side of the deal you are on. For instance, the real estate market had experienced a considerable boom. Housing prices were soaring, and bidding wars became a norm due to the lack of supply. Homes were selling for way above asking due to the pandemic. It isn't uncommon to see homes valued under 1 million go well over these days. The pandemic is certainly helping sellers grab some extra cash this year.
With record (and back) breaking price tags, there have been concerns that some buyers may be biting off more than they can chew. Some buyers had to stretch their mortgage budget to stay competitive in the real estate market. This is why there have been new rules introduced in the real estate arena this year.
The Canadian federal government, or to be specific, the Office of the Superintendent of Financial Institutions (OSFI), is responsible for the safety and soundness of the country's financial systems. Changes to the mortgage stress test were put into effect earlier this month, June 1st, 2021, to protect home buyers from themselves. The OFSI has essentially increased the amount that borrowers have to prove they can afford.
The purpose of the new rules is to ensure buyers can afford their new homes in the case that interest rates go up.
What is the mortgage stress test in Ontario? It's actually quite simple.
The stress test was essentially introduced four years ago in 2017 for anyone applying for or renewing a home loan. It uses a qualifying mortgage rate to ensure buyers can afford what they are paying for.
The new qualifying mortgage rate is now 5.25 percent. This means, to pass the stress test, you must still be able to afford your mortgage payments if your interest rate increases to a value called the qualifying rate. Your current or target interest rate plus 2%. For some people looking to buy a new home, they now will have reduced buying power.
For example, if a buyer originally qualified for $500,000 when using the old minimum qualifying rate of 4.79 percent, that amount is reduced to $479, 000 under the rate of 5.25 percent. The new rules have already had an impact on the real estate market which has cooled down a little since the spring period.
This stricter rate will be applied to both insured and uninsured mortgage borrowers.
On one side of the argument, many people agree these new rules were prompted by high debt levels and will likely cool down the market for an extended period of time. If there are fewer buyers, then the purchase prices will also drop.
However, on the other side of the argument, there is the thought that this increase in the qualifying rate is small. In fact, too small to actually make a dent in the market. These experts believe there may be a short-term cooling-off period followed by a hot market and little to no long-term impacts.
Some industry insiders believe the affordability challenges will remain the same because housing prices won't actually go down by much. One thing is sure; whether you are a buyer or a seller, you will need to keep up to date on the real estate market, which is constantly changing.
Countrywide Homes sales representatives are here to help you along the way. Take a look here at some of our current and upcoming communities to choose a home that’s best suited for you.