Introduced in 2017 with intentions to cool the red hot real estate market, the mortgage stress test has seen a number of changes over the years. The latest change to the stress test took effect on June 1st, 2021, making it more difficult for prospective home buyers in Canada to qualify for a mortgage. The new benchmark was introduced for the same reasons the stress test was originally introduced – to assist in cooling a seemingly unstoppable real estate market.
The market, which has been consistently hot throughout much of the COVID-19 pandemic, has seen many instances of competitive bidding wars and some buyers even purchasing homes sight unseen. The surge in real estate activity can be credited to Canadians being unable to travel abroad and take part in the recreational activities they were previously able to enjoy and spend money on, leading to many looking to upgrade their home or invest in the market due to similarly high demand for rental properties.
With the new stress test benchmark having been implemented, Canadian home buyers applying for an uninsured mortgage or looking to renew an existing uninsured mortgage may suddenly find that it’s now more difficult to qualify for a mortgage. Here’s what you need to know about the new mortgage stress test rules.
Changes to the mortgage stress test rules effective June 1, 2021
The changes to the mortgage stress test, announced in May, will make it more difficult for prospective homebuyers in Canada to qualify for a mortgage. The new rules, effective June 1st, will impact homebuyers looking to qualify for a mortgage uninsured by CMHC – those with a down payment of over 20% of the purchase price. Buyers will now need to show that they can pass the new qualifying rate of 5.25% or two percentage points above the mortgage interest rate.
Prior to the changes to the stress test, homebuyers were required to show that they could afford payments of up to 4.79% or two percentage points about what they were being offered by a mortgage lender. Despite not seeming like a major change, the new stress test rules will reduce affordability for uninsured borrowers, who make up a massive percentage of the real estate market.
How do the new stress test rules impact homebuyers?
Once again, it appears that the most heavily impacted group will be first-time homebuyers. Prospective homebuyers will now be required to prove to their mortgage lender that they would be able to afford mortgage payments well above what their actual cost would be, reducing affordability and potentially forcing first-time homebuyers to settle for less than what they can actually afford.
For example, if you were pre-approved to purchase a $500,000 home with a 20% down payment, you’ll now likely be qualified to purchase a $480,000 home and will be forced to make up the difference with a higher down payment or through a co-signer. It’s thought by some that the changes will mostly affect homebuyers with a high debt-to-income ratio, but its impacts on affordability are undeniable.
Unless first-time buyers were able to secure a pre approval prior to the new rules taking effect on June 1st, the new stress test rules may force first-time buyers to cut costs in order to prove their ability to purchase a home which they were likely able to afford before June – especially with home prices at near-record highs. Homeowners looking to renew their mortgage with a new lender will also be impacted by the changes.
It’s not all bad news for first-time homebuyers, however. The reduced buying power caused by the new stress test rules will likely be offset somewhat by consistently low mortgage rates, making up for at least some of what was lost by the introduction of the new benchmark.
Real estate investors can also take solace in the fact that most experts agree that the new stress test rules are unlikely to make a significant impact on the price of homes, especially with record-high demand and the aforementioned low mortgage rates being offered by lenders.
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