Get Stress Free - Get the Ins and Outs of the "Stress Test" and Mortgage Rules
Hey home buyers!
Home buying can be a stressful time, regardless of what time of year you are buying. In 2017, the real estate market hit an all-time high as people started to sell their homes in Toronto and bringing their money-filled pockets into the Niagara Market. After a year of mayhem and buyers stretching themselves financially thin in order to purchase a home, the government decided that it was time to take action and implement a new set of mortgage rules (ie the "stress test") that would slow down the market. My job today is to provide a simple explanation of the stress test rules and how it has and will continue to effect home buyers moving forward.
MORTGAGES BEFORE THE STRESS TEST
When a home buyer was getting a mortgage before 2018, one of the main pieces of information the bank wanted from them was the percentage (%) of the purchase price the buyer was going to give as a down payment on the house. Two different sets of rules were in place:
Under 20% down payment
- Required to pay for mortgage insurance
- Required to qualify at the Central Bank's Benchmark Rate (rate that lenders are required to use to qualify mortgage borrowers in Canada who want a variable rate mortgage or a mortgage term of less than 5 years).
Over 20% down payment
- Not required to pay for mortgage insurance
- Not required to qualify at the Central Bank's Benchmark Rate, but could qualify based on the rate given by the banks at that time.
MORTGAGES AFTER STRESS TEST
In order for ANY BUYER to obtain a mortgage from the bank, they now have to qualify for a mortgage at:
a) the Central Bank's benchmark rate (currently at 5.34%)
OR
b) at the interest rate the bank will give you + 2%, whichever rate is HIGHER!
Let's look at an example to get a bigger picture of the situation:
BEFORE
Household income: $100,000
Mortgage Rate: 2.83%
Amortization: 25 years
This household can afford a home worth $726,929
AFTER
Household income: $100,000
Mortgage Rate: 2.83%
Qualifying Rate: 4.83% (mortgage rate + 2%) or 4.89% (example benchmark rate). 4.89% is the higher rate, so a buyer must qualify at this rate.
Amortization: 25 years
This household can now afford a home worth $570,970.
* The new mortgage rules have reduced the buyer's purchase price by $155,969 (21.45%)!
This is clearly not a minor rule change. The new stress test has impacted all home buyers in terms of their buying power, and it has become increasingly difficult for first-time buyers to get into the housing market.
ALTERNATIVE OPTIONS
Fortunately for buyers who cannot qualify for their desired mortgages, there are other financing options available:
Credit Unions - Because Credit Unions are provincially run, they do not have to abide by the stress test regulations that were implemented by the federal government. Some Credit Unions have tried to mirror the banks and implement the stress test rules, but not all of them do. Credit Unions present a viable solution for first time home buyers and buyers looking to avoid the implications of being under the stress test.
Buy with a buddy - If you're a first time home buyer but can't afford to get into the market on your own, find someone you know that's in a similar situation and buy together! It's not ideal for everyone, but it is a good way to get into the market and build up home equity you would not be able to otherwise.
Bank of Mom and Dad - Lots of millennials have turned to their parents to lend them some money so that they can get into the housing market. For those of you who think this could be a possibility, it never hurts to ask your parents and see what they say. I would advise that if you are proposing this to your parents, make sure you have a solid plan in place to pay them back to show them you have thought this through and assure them they will get their money back over a certain period of time.
CONCLUSION
I want to end by encouraging you that this is not the first rule change affecting financing on homes and it won't be the last. Through all the changes over the years, the Canadian Market has remained strong and survived tough times, even when the USA has gone through times of serious recession. Real Estate is still a safe and wise investment. So stay stress free, and if you are looking to buy remember to explore all your financing options. If you have questions about anything I post or about anything else regarding real estate, feel free to connect with me and I'd be happy to talk.