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What’s with the new stress test?

June 3, 2021 | Buying

If  you follow the real estate market at all, it should come as no surprise to you that as of this week Canadian home buyers will be subject to a new stress test.

The new stress test was announced by the Office of the Superintendent of Financial Institutions on May 20.  As of Tuesday June 1st , the new calculation of the minimum qualifying rate for uninsured mortgages was set at either the mortgage contract rate plus two per cent or 5.25 per cent — whichever of the two is greater.

What Is The Stress Test?

Launched in 2017 to cool down the overheated market of the time, the stress test is a minimum threshold that anyone applying for a home loan in Canada must meet.

While the stress test doesn’t make the loan itself any more expensive; it does work ensure that anyone getting a mortgage will be able to pay it off if rates go up.

Why Was It Implemented?

The stress test, initially announced in May, was in response to an overheated market that has already begun to see signs of cooling.

The pace of home sales seen at the start of the year began to slow in April, as the number of homes sold fell by 12.5 per cent compared with the record high set in March, according the Canadian Real Estate Association (CREA).

While the stress test could slightly dull the market, it likely won’t significantly cool conditions.

Doug Porter, BMO’s chief economist stated that despite this  new stress test, there is still a lot of demand , and while qualifying will be more difficult, rates are still low.

Porter also added that once the pandemic eases, an increase in immigration will likely further fuel demand, putting added pressure on the market.

How Does The Stress Test Impact Buyers?

CTV’s Tom Yun put together this example:

Let’s say a home buyer hopes to get qualified for a mortgage with a rate of 1.69 per cent in order to buy a $716,828 home. After a 20 per cent down payment, they would need a mortgage of $573,462. With an amortization period of 25 years, their monthly payment would be $2,343.41, according to the federal government’s mortgage calculator.

But given that 1.69 plus two per cent is less than 5.25, the borrower would be stress tested against a 5.25 per cent interest rate. At 5.25 per cent, the borrower’s monthly payments would be $3,417.36. The borrower would need to prove that they had enough income to afford the $3,417.36 payments, even though they would actually be paying $2,343.41.

“Insured borrowers are about a quarter of the market,” Rob McLister, mortgage editor of rate comparison website RATESDOTCA told Global News. “And so these folks are generally earlier in their careers. They have less financial resources … so when you reduce their buying power, it has a disproportionate impact.”

 This stress test will hit first-time homebuyers particularly hard.

It will impact everyone, whatever your income may be, but it is surely first time homebuyers who will really feel the limitations of this stress test in regards to affordability.

“It is vitally important that homeownership remain within reach for Canadians. We know that we need to take energetic action on housing supply and affordability in Canada,” finance minister Chrystia Freeland said in a statement last May.

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