02/06/2021
As of yesterday, June 1st, 2021, the Government of Canada implemented a change to the current stress test. What does this mean for home buyers?
The stress test was implemented by the Government in late 2017 and is a set of rules that banks must follow to loan money to home buyers. The stress test was implemented to protect borrowers through ensuring that buyers weren’t purchasing beyond their means. As interest rates have been at historic lows, the stress test ensures that a buyer will still be able to afford their mortgage payments when interest rates raise. This is done by calculating the mortgage approval at a considerably higher interest rate than what you would actually be getting. As of June 1st, the banks will have to use the minimum qualifying rate for both uninsured (more than 20 percent down payment) and insured (less than 20 percent down payment) will be higher than either the rate offered by the lender plus two percent, or 5.25 percent which is up from 4.79 percent prior to June 1st.
Essentially, what this is doing is it is limiting a home buyer’s purchasing power. For example, prior to June 1st, a buyer who qualified for a $418,500 mortgage would now qualify for a $400,000 mortgage instead with the new rate of 5.25 percent. Now that doesn’t mean that your interest rate will be that high, but that rate or prime plus two percent will be the rate used to determine the amount the bank is able to lend.
Is this a bad thing? Well, it depends who you ask. The stress test was implemented to cool the hot housing markets in Toronto and Vancouver back in 2017, however the policy was blanketed across Canada and ended up impacting the first-time home buyers the most by limiting their qualifying power. At the end of the day, it is there to protect borrowers from spending beyond their means. It is a good idea to have a pre-approved mortgage before house shopping to best understand the amount you will qualify for!