Buying a home in Canada just got a lot more stressful. Recently, the OSFI’s stress test has become substantially more challenging to pass – and hardly anyone noticed. The qualifying rate is now as high as 6.00%. If it wasn’t hard enough to purchase a home in Canada, now it’s even harder. And if rates keep going up as they’re predicted to, it’s not going to get any easier.
What Is a Stress Test?
To ensure homeowners can withstand future rate changes, federally regulated mortgage lenders are required to administer a stress test. This stress test uses what’s called a “qualifying rate” to ensure that you can continue to afford your home in the event rates increase in the future. The qualifying rate will always be much higher than your actual rate. Right now, it’s whichever is higher between 5.25%, or your contract rate + 2.00%. For example, if you found a fixed rate mortgage of 3.69%, you would be stress tested at 5.69%.
Why Does This Matter?
The last time the OSFI raised the qualifying rate was about a year ago. The landscape was different then. Both fixed and variable mortgage rates had hit record lows, so while the qualifying rate was higher, the stress test was relatively manageable. That was then. This is now. Fixed rates have been soaring for months, and variable rates have begun a slow but steady ascent as well. Higher mortgage rates with a higher qualifying rate will be anything but manageable for the average Canadian hoping to purchase a home.
Take, for example, a 5-year fixed rate mortgage at 4.04%. You wouldn’t find rates like this last year. But now, they’re not uncommon. Someone borrowing at this rate would have to qualify at 6.04%. What does this mean? It means that their buying power has decreased by 5%. Or, to put it into perspective, families earning $150k can now qualify for a maximum mortgage of $690k instead of $742k.
This is significant. The government is supposed to make housing more affordable and encourage “safer” mortgage options in the form of fixed rate mortgages. Not only do constant rate hikes make homeownership increasingly unaffordable; they also push people towards “unsafer” options in the form of variable rate mortgages. Why? Because people can actually qualify for them. It’s easier to qualify for variable rate mortgages than it is for fixed. We haven’t seen this in 10 years.
What Should I Do?
If you feel like you’re being pushed towards a variable rate because of the stress test, don’t worry. That’s not a bad thing. Variable rates may be going up slightly, but they’re still low. You’re much more likely to qualify, and you’ll save a ton of money on the total cost of your loan. As long as you hang onto your property for 7 years, you’ll be in good shape – that’s why I still recommend variable rate mortgages.
The Bottom Line
Recently, I needed some specialized legal information. I spent hours trying to find what I was looking for by myself. After all, everything is online, right? And yet, I just couldn’t find what I was looking for. Then a friend said to me, “Steve, why would you spend dozens of hours trying to find this info when for a small fee, you can get a legal professional to find it for you?”
The same is true with mortgages. Don’t take on one of the biggest undertakings of your life just because you think it will save you money. In the long run, it won’t. Between stress tests, rate hikes, and different product options, there’s a lot to consider – and there’s a lot at stake. Trust an expert to guide you through the process and help you make informed decisions that set you up for success.
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