Are Canadians Ready For A Tougher Stress Test?
Securing a mortgage just got a little more difficult. As you likely know, getting an uninsured mortgage in Canada requires you to prove you can keep up with payments if rates go up. This hypothetical rate, called the qualifying rate, is changing. On May 24, the Office of the Superintendent of Financial Institutions announced that they will be raising the qualifying rate effective June 1st.
The New Qualifying Rate
The OSFI’s rather abrupt announcement details that the new qualifying rate is 5.25%, or 2% added to your contract rate, whichever is higher. These changes are swift and steep, and will no doubt impact the average homebuyer.
How Does This Affect Me?
This announcement means you’ll have to prove you can make payments against a much higher rate than in the past. Let’s put it this way: rates are currently as low as 1.40%. If this is your rate, you’ll have to qualify against 5.25%, a rate that’s 3.5 times higher. Seems excessive, doesn’t it? It’s because it is. These sweeping changes are supposed to help Canadians, but can actually end up harming them. In the end, qualifying for a mortgage becomes more difficult, and if you do qualify, it’s for 4% less mortgage than before.
Here’s how this could affect you:
|Scenario||Signed PSA dated before June 1, 2021||No PSA or PSA dated on or after June 1, 2021|
|Pre-approval or full app started prior to June 1, 2021||Pre-June 1st Rate Rules||New Rate Rules|
|Pre-approval prior to June 1, 2021 converted to a full app on or after June 1, 2021||Pre-June 1st Rate Rules||New Rate Rules|
|Approved application resubmitted with a material change on or after June 1, 2021||New Rate Rules||New Rate Rules|
|No application prior to June 1, 2021||New Rate Rules||New Rate Rules|
Why Is This Happening?
The housing market is red hot, and the government is doing whatever they can to cool it down. Experts agree that a stricter stress test won’t solve anything, but that hasn’t stopped the government from imposing it. The real factor underscoring the current state of our housing market is being largely ignored: Canada’s housing supply issue. There simply aren’t enough dwellings relative to the number of people who live here. Until the government addresses this imbalance, housing prices will remain high, and unfortunately, a 5.25% qualifying rate won’t fix that.
Homeownership is still the way to go, even in the face of higher prices and tougher loan requirements. But if you do decide to buy right now, hold on to your property for 7 years. This is the amount of time it typically takes to wade through the ebbs and flows of an economic cycle. Also by this time, your acquisition and disposal costs should be fully amortized.
If you decide to hold off on buying and want to continue renting, it might be a good idea to find a new rental property right now. Renting a privately-owned home leaves you vulnerable if the owner decides to sell, which is more likely now than ever. A new lease agreement will allow you to lock in a reasonable price before rent inevitably goes up, and will offer you peace of mind. However, I ultimately always recommend buying over renting. The sooner you can enter the market, the better.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; firstname.lastname@example.org
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