If you have been flirting with the idea of purchasing a new home in the near future, you have undoubtedly heard the words 'stress test.' Stress tests are already mandatory for mortgages in which the down payment is less than 20%, which was initially introduced earlier this year as part of the the Federal Government's attempt to cool the heated housing market.
Canada's banking regulator recently announced, that beginning January 1, 2018, a new mortgage stress test will come into effect. The upcoming stress test will affect homebuyers with large down payments. So, if you have a downpayment of 20% or more and you don't require CMHC mortgage default insurance, you'll now need to qualify at a higher rate then you will actually be paying.
How much higher?
The stress test will require an uninsured home buyer to qualify at a rate two percentage points higher than the actual rate on their contract, or at the posted five-year Bank of Canada rate, whichever one is greater. Therefore, someone who qualifies for a five year rate as low as 2.97% today would see that hurdle rise to almost five per cent when the new stress test is applied.
What can I afford under the new rules?
A couple that makes a combined income of $150,000, with minimal debt and a 20% down payment, could see their approved mortgage limit drop from $850,000 as of today to $650,000 based on the new guidelines; that translates to needing almost 20% more income to qualify for the same size mortgage.
Sentiment is mixed on how this will impact both the real estate market and the Canadian economy in general. These changes will be felt increasingly down the road as 47% of mortgages are due to reset within 1 year, 31% in the next 1-to-3 years, forcing homeowners to qualify under the new rules when they renew their mortgages (source).
As 2017 wraps up, we are seeing a rush in the market place to close on purchases prior to the New Year, and can anticipate a slightly softer January as the market becomes accustomed to the new rules and buyers reevaluate their budgets.
If you would like more information or a chance to discuss how these changes will impact your buying power, I can easily be reached below.