Jan 1st saw the implementation of the new stress test for mortgage. Media coverage was all over the place trying to predict what effect it’s going to have on the market.
I think that what the media does best is confuse and scare everyone. Let me give you a breakdown of what actually occurred:
Prior to Jan 1st, if you were qualifying a mortgage based on a 5 year fixed rate and you were putting a downpayment of over 20%, you would use the actual contract rate (let’s say 3.49%). After Jan 1st, all federally regulated lending institutions had to adopt the new stress test which would add 2% to the existing contract rate or the bank of Canada benchmark rate of 5.14%, whichever was higher.
What does that mean for the home buyer?
So let’s say a couple has an annual combined income of $80,000. This couple prior to Jan 1st were pre approved for a purchase price of $630k with a 20% downpayment with no other debts or monthly obligations. After Jan 1st, the maximum purchase price would be $510k.
This significantly effects purchasing power, without a doubt.
Don’t Panic. It’s not all doom and gloom.
What consumers should be aware of is that there are provincially regulated credit unions that still qualify at the contract rate since they are not obligated to abide by the new rules. Duca, Meridian and First Ontario to name a few.
So the same buyers I mentioned above are still able to buy the $630k house like they were before.
What do I think?
I don’t think the stress test was a good idea and I don’t think that the regulators properly assessed what effect this would have and we have yet to see what effect it will have. I think the decision to make it more difficult for Canadians to own a home is not a good one especially when foreign buyers have a relatively easier time obtaining a mortgage in Canada.
The media has always brought a lot of panic to the housing market. We have been hearing about a bubble that’s about to burst and I see no indication of a housing bubble whatsoever. Any economist I’ve spoken to or listened to in the last few years agrees. I’m just hoping that lenders will revamp some of their policies to make qualifying a bit easier. Many lenders have to get with the times and become a little more innovative in the products they provide. Lenders are looking for AAA deals but no one is willing to make the first move to offer solutions that are out of the box. I call them dinosaur lenders and I hope they will wake up.
Due to more complex and restrictive rules, you should be aligned with a great Mortgage Broker. Your chances and choices of obtaining a mortgage that’s right for you increase greatly. Now more than ever, people have to explore all options available to them instead of trusting their bank.
Broker of Record & Mortgage Gladiator
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