How Your Buying Power Changes with Stress Test
Stricter mortgage regulations are coming January 1, 2018. It’s time to think about what that means for you. Back in October of 2016, the federal government implemented new mortgage rules, endearingly known as “stress tests”, that required all insured mortgages to be approved at the Bank of Canada’s posted rate of 4.64%. Now, a similar stress test is coming to non-insured mortgages.
Key things to know
When the new rules kick in, everyone applying for a mortgage will have to prove that they can afford the monthly costs of a 4.89% mortgage – regardless of the rate they are offered and would pay if they are successful. For example, a couple want to lock in a 2.75% variable rate mortgage. They will have to prove they can afford 4.89%. The stress test rate for uninsured mortgages with 20% down payment is either 4.89%. Or the offered mortgage rate plus 2%, whichever is higher. Let’s assume that same couple is now being offered a 2.95% rate. They must now prove they can afford a 4.95% monthly payment (2.95%+2%).
Finally, the stress-tests will apply to new mortgage loans and mortgages that are refinanced or renewed with a different financial institution. If you’re chasing a lower rate in a few years, you might need to pass the stress test to get it. The stress test will not apply if you’re renewing with the same financial institution.
How will the stress test impact purchasing power?
According to Canadian real estate blog Better Dwelling, 49% of Toronto households have a median income capable of carrying an average home purchase of $750,800 with a mortgage rate at 2.89%. Under the new 4.89% stress test, that number will drop to 38%.