Have you heard of the mortgage “stress test”? The stress test was introduced in January, 2019, and is still in effect today. The purpose of the stress test is to ensure today’s borrowers will still be in a position to afford their mortgage payments in the future, should we see an increase in mortgage rates.
So for example, if you were to obtain a new mortgage today, you would be getting a rate anywhere between 1.4-2.4% (depending on your term and product), however you would be qualified based on a mortgage rate of 4.79%. In other words, rather than using your actual mortgage payment to calculate your debt servicing ratios, we would using the payment based on 4.79%. Of course, this makes a big difference when it comes to advising you on your maximum purchasing power.
Recently, the Canadian bank regulators announced that there are likely some changes coming to the stress test for those borrowers obtaining an ‘uninsured’ mortgage. An uninsured mortgage is one in which the borrower has at least a 20% down payment on their purchase, or is completing a refinance transaction. For these types of loans, the regulators are looking to increase the stress test, as of June, 2021, from 4.79% to 5.25%, nearly 50 basis points higher!
The impact of this change on borrowers is largely dependent on the individual income and debt scenarios, however on average is looks like this will decrease borrowing power by about 4.5%. In 2019 when the stress test was first introduced, borrowing power for all borrowers decreased on average by about 22%, and now for those borrowers with higher down payments, we are likely going to see a further reduction of around 4.5%.
Personally, I feel that the stress test is overkill. As the broker/owner of The Place to Mortgage, and being in the mortgage industry for over 12 years, I will be the first to tell you that I have never seen interest rates greater than the high 3% range. A stress test of 4.79-5.25% seems much too high, in my opinion. I feel the stress test is not protecting borrowers from future increased rates, but rather is pushing borrowers out the market, and forcing them to continue renting. Granted, I do believe there should be protections in place to protect and ensure affordability in the future, I just think this has gone too far!
To learn more you can also visit https://www.canadianmortgagetrends.com/2021/04/homebuyers-to-face-more-stringent-mortgage-stress-test-after-june-1/