The federal government has decided to make it harder to get a mortgage, in the hopes to slow down the overheated housing market. The new calculation of the minimum qualifying rate for uninsured mortgages will be set at either the mortgage contract rate plus 2% or 5.25 per cent, whichever is greater. The original stress test began in 2017 at 4.79% as a previous attempt to cool down demand, and it has now been raised as of June 1st, 2021.
For buyers, this means:
If a home buyer hopes to get qualified for a mortgage with a rate of 1.69% (current 5-year fixed rate) in order to buy an average price of $716,828 for a home, they would need a mortgage of $573,462 after a 20% down payment. Their monthly payment would be $2,343.41, wiith an amortization period of 25 years. Now, 1.69 plus 2% is less than 5.25, so the borrower would be stress tested against a 5.25% interest rate – at this rate, the borrower’s monthly payments would be $3,417.36. This means the buyer needs to prove that they make enough income to cover the $3,417.36 payments, even though their actual payment would be $2,343.41.
The government is hoping that this additional stress test will protect buyers who may struggle to make their mortgage payments if interest rates increase in the future. The rates are currently still at record lows as a result of the pandemic, but they are not guaranteed to stay low in the long-run.
For first-time homebuyers, this means:
Many will likely have to get their parents to cosign their mortgages, so they can actually get the property. Davelle Morrison, a sales representative for Bosley Real Estate in Toronto, didn’t think the tougher stress test to protect buyers was necessary: “Why stress test people at 5.25 per cent? Because that’s the rate they won’t even be paying for five, 10, 15 years,” she said. “You know, when’s the last time people actually had to pay a rate of 5.25 per cent for their mortgage?”
Currently, the new rules only apply to uninsured mortgages. However the Department of Finance says it is working to apply the same rules to insured mortgages in the future as well. They believe is it beneficial: “It is vitally important that homeownership remain within reach for Canadians. We know that we need to take energetic action on housing supply and affordability in Canada,” stated finance minister Chrystia Freeland last May.