The latest updates to Canada’s stress test have made it more difficult for first-time buyers to get into the real estate market, having to prove to lenders that they’ll be able to borrow at rates significantly higher than those currently posted by Canada’s major mortgage providers. The new rules have really reinforced the importance of home buyers saving for a significant down payment in order to buy a house, and paying down debt before going to a lender in search of a mortgage. Without a sizable down payment and low debt-to-income ratio, new homebuyers will have a difficult time buying a property they could’ve afforded just a couple years ago.
Do away with debt before you apply for a mortgage
One of the biggest obstacles to getting a favourable mortgage is debt. This has become even more important with the introduction of the strict new stress test rules, which requires buyers to prove that they can afford to pay for a mortgage at a stress test rate of 5.25%. The move effectively reduced buying power by up to 5%, with homebuyers now having to make up for the gap with a larger down payment.
With a high debt-to-income ratio, securing a mortgage under the new rules becomes even more difficult, as lenders will see this as an indication that you won’t be able to make payments on posted mortgage rates, let alone the higher stress test rate. Before you head over to your lender, it’s important to understand what your debt-to-income ratio is and take the steps to pay down debt in order to become a more attractive borrower.
Lenders will look at all forms of debt, including student loans, vehicle payments, and most importantly, high interest debt like credit card debt. Buying a house comes with a number of new expenses, including mortgage payments, insurance, utilities, maintenance costs, and property taxes, and the less debt you have, the more capable of paying for these new costs you’ll appear to be in the eyes of lenders.
Pay off credit card debt ASAP
Before applying for a mortgage, it’s highly recommended that you pay down credit card debt as soon as possible. You’re not required to be completely debt-free, but the less you have outstanding, the better. Paying off your credit card before applying for a mortgage lowers your credit utilization ratio, making it easier for you to pass the stress test and qualify for a mortgage you can realistically afford.
High interest debt like credit card debt reflects poorly on your ability to qualify for a mortgage, and paying it off will have a massive impact on what you’ll be able to afford and qualify for. Paying off credit card debt starts with simple steps like paying more than the minimum monthly payment towards your debt, creating a budget which focuses on eliminating unnecessary spending and putting that saved money towards credit card payments, and only using your credit card in emergency situations. Other options like debt consolidation exist, but most experts recommend simply paying off as much of your debt as possible before proceeding.
Save money, pay off debt or play the waiting game
The new stress test leaves real estate investors with three options: save money for a significant down payment that will make up for the lost purchasing power caused by the higher stress test, pay down debt and reduce your debt-to-income ratio to improve your chances of easily passing the stress test and securing a favourable mortgage rate, or wait it out.
The Toronto real estate market has seen incredible highs since the beginning of 2020, only now showing signs that some stabilization may be on the way. Patient investors looking to break into the market or expand their hold on it may want to play the waiting game to see if a stabilizing market will be more favourable to them, allowing for more time to save up for down payments and pay off high interest debts.
Paying down debt has always been a critical part of buying a house, but recent changes to the stress test have really reinforced the importance of lessening your debt load and saving money for a good down payment. It may not be fun to wait it out, but you’ll be debt-free and ready to break into the market before you know it, ready to drop a down payment on the property of your dreams.
HighGate Properties is a leading provider of Toronto property management services, offering commercial and residential property management services that save time and stress for landlords. Our experienced team will take care of the time consuming aspects of being a landlord like tenant screening, maintenance, and inspections, freeing you up to take care of the things you care most about. To find out more about the property management services offered by the team at HighGate, get in touch with us today.