The new mortgage stress test can have a big impact on the market, and specifically, a person’s buying power. It is important to understand what the stress test is to begin. Rather than being a specific test, it is more of a set of rules banks use to determine whether or not you qualify for a mortgage, and how much you can borrow. Confusion is continuing to grow, as rules for the stress test continue changing, with one of the most recent changes occurring for insured mortgages on April 6th, 2020 according to MoneySense.
The purpose of the stress test is to ensure that when mortgage rates do rise, as they are currently very low, they will protect borrowers from very high payments. It is also used to consider whether or not you could afford payments if you were to have a reduced or lost income. As home prices continue to fluctuate, it is important to use a stress test to determine what kind of home you could safely buy.
In April 2020, there were changes to how the Bank of Canada qualifying rate is calculated, based on the mode average of posted 5-year fixed rates from large banks in Canada. As of 2020, the Bank of Canada qualifying rate was 4.79% (Ratehub.ca, 2020). Your income needs to be high enough, as well as existing debt low enough, to be able to pay this rate, which is higher.
The Office of the Superintendent of Financial Institutions’ B-20 guideline also contributes to the struggles new obligations of the stress test could present. RBC president and CEO Dave McKay believes that making the stress test tougher could “side-line” would-be buyers. It is important to consider that an increase in interest rates is very possible when home prices are greatly increasing. It is also important to note that OSFI is proposing to set a “fixed floor” rate of 5.25 percent, rather than relying on the current or previously proposed benchmark rate. This was also the rate that prevailed in the 12 months leading up to the pandemic.
So what is the best way to address the changing situations brought about by the stress test? For one, keeping in contact with a reputable mortgage broker can help you stay up-to-date with changing lending and borrowing policies, so you are aware of the amount that is in your best interest to borrow. You may also want to consider having a broker help you stress test a mortgage before buying.
The key take-away is home-buying can be made very difficult due to increased stress test rates, and it is very important to save more money for a down-payment and make sure you have a reliable income to fall back on, especially when pre-pandemic financial conditions could be on the horizon. Shane Madhani is an award-winning realtor specializing in Condos, Single Family Homes, Renos & Financing in Toronto & the GTA.