If you’re looking to buy a home, you will now need to prove you can make payments based on a minimum rate of 5.25% starting today when dealing with a federally regulated financial institution.
Whether you’re making a down payment of less than 20% or more than 20%, you’ll now be qualified based on your contract rate plus 2%, or 5.25%, whichever is higher. That’s up from the previous qualifying rate of 4.79%.
The changes were announced by the Office of the Superintendent of Financial Institutions and the Department of Finance last week. The increase is expected to reduce purchasing power by approximately 4-5%.
Here are a couple of examples of how the new stress test will affect buyers based on home values:
Before June 1, 2021
$400,000
$600,000
$800,000
After June 1, 2021
$382,400
$573,600
$764,800
*Note these are estimates only based on a 5-year fixed term, 25-year amortization and doesn’t include expenses such as heat, taxes, insurance and condo fees.
The increased minimum qualifying rate isn’t likely to shut would-be buyers out of the market since it’s not actually increasing costs, noted BMO chief economist Douglas Porter.
“It just throws up some potential limits on what they can borrow — if they were already borrowing up to the limit,” he told the Financial Post.
Porter added that because the new policy affects all borrowers, it has the potential to rein in prices somewhat since all homebuyers are now faced with reduced purchasing power.
“Think about it this way: If Ottawa gave every renter in the country a $10,000 gift card that could only be used to buy a new home, the only winner from that would be home sellers, not the buyers, because every home price in the country would immediately go up $10,000,” he said.
Bank of Canada Governor Tiff Macklem welcomed the changes to the insured and uninsured mortgage stress tests, noting recently that homebuyers are still enjoying “unusually low” mortgage rates.
“Borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates,” he said.
Grandfathering Rules
For homebuyers who already had a binding pre-approval prior to June 1, some lenders and mortgage insurers have said they will be qualified under the previous stress test rate, for both insured and uninsured loans.
This also applies to those with a signed offer to purchase dated prior to June 1.