The rumours are true; the dreaded stress test is being reduced!
In May of 2018, policy makers instituted the Stress Test for mortgage qualifying with the intention to ensure that homeowners would be able to keep up with increased payments, as interest rates increased. At the onset, the Stress Test qualifying rate was 5.39%. It dropped slightly to 5.34% along the way, and as of today, is sitting at 5.19%. In simple terms, this means that even though I can secure you a 5 year fixed mortgage at around 2.64%, and your payments will be based on that actual rate, you must qualify as though your payments were much higher, and based on 5.19%.
Although rates have gone up and down a few times since the Stress Test was first implemented, the highest point was around 3.69% at the beginning of 2019. Of course, this is much lower than the qualifying rates we have been required to use under the current Stress Test guidelines.
In my opinion, the implementation of the Street Test has not been effective in protecting consumers, but rather, is resulting in numerous unintended consequences including, but not limited to:
- Homeowners who would like sell in order to DOWNSIZE their home/monthly payments, are being forced to stay where they are, as they do not qualify for even a smaller mortgage under the current rules; and
- Homeowners who would like to consolidate consumer debt using the existing equity in their home, which would put themselves in a considerably better financial position by paying much less interest, are being forced to continue paying higher rates, and at times, are being forced into consumer proposal or bankruptcy, as they do not qualify for a new mortgage under the current guidelines.
These newly announced changes to the Stress Test are certainly not taking us back to the “good ol’ days”, but are definitely a step in the right direction!
What you need to know:
Effective April 6th, 2020, the qualifying rate for the Stress Test will be the higher of your actual mortgage rate (contract rate), or the median insured mortgage rate, plus 2%.
What do I mean?!?
Effective April 6th, 2020, rather than using a mortgage payment based on 5.19% for qualifying purposes, I will now be able to use a rate around 4.89% (based on today’s median insured rate).
A real life example:
A first time buyer that I’m working with right now who has one small credit card and earns $76,000/year, currently qualifies for a purchase price of $350,000. As of April 6th, and based on the new qualifying guidelines, he will qualify for a purchase price of $370,000; just over 5% more!
Of course, every application is unique in regards to income/debt/down payment. If you have been told in the past that you didn’t qualify for a mortgage, or if you are simply curious if you may qualify now, then please message me. Your situation may have changed, and I would love to evaluate things, and put a game plan in place for you. ?
My hope is that with time, we will continue to see more regulatory changes come into effect, which will in turn increase access to home ownership for all, but for now, I’m grateful for small steps forward.
