As of June 1, Canadian homebuyers will face tougher mortgage stress test rules that will decrease the buying power of most borrowers; those applying for or renewing a mortgage. The stress test was introduced on January 1, 2018, as a way to protect Canadian homeowners by requiring banks to check that a borrower can still make their payment at a rate that’s higher than they will actually pay. The purpose of the stress test is to evaluate if a borrower (a.k.a. the potential homeowner) can handle a possible increase in their mortgage rate (Scotia Bank. The Canadian Mortgage Stress test in 2021. Retrieved April 7, 2021).
For homebuyers who have a down payment of 20% or more, the current qualifying rate is determined using the Bank of Canada’s five-year benchmark or the interest rate offered by the lender plus 2% (whichever is higher). For homebuyers who have a down payment of less than 20%, the qualifying rate is the higher of the Bank of Canada five-year benchmark rate and the interest rate offered by the lender.
The new stress test rules include:
- Limiting mortgage applicants to spending a maximum of 35% of their gross income on housing
- Capping the borrowing of up to 42% of their gross income once other loans are included
- Requiring the borrower to have a minimum credit score of 680 (good score).
- Requiring homebuyers to use their own money for a down payment instead of borrowed funds. This means homebuyers are no longer able to use unsecured personal loans, unsecured lines of credit or credit cards to fund their down payment.
- Homebuyers with a down payment of less than 20% of the purchase price are required to purchase mortgage default insurance. Properties costing $1 million or more are not eligible for mortgage default insurance.
This does impact everyone. It doesn’t matter what your income is, your affordability is reduced. The new mortgage stress tests alone likely won’t put a huge dent in home prices either, which is great news for Sellers, but difficult on Buyers!
So as we head into the spring 2021 housing market, we’re facing record sales, record low supply, record tight market conditions and record price growth. With this said, you need a team that will have your best interests in mind to navigate this market and educate you on making sound financial decisions for yours and your family’s future.
-Rachel Rosart