As of June 1st, the ‘mortgage stress test’ will be slightly higher, which sounds like it may be harder for you to borrow money for an uninsured mortgage (for which your down payment must be at least 20 per cent). However, before this stresses you, think about it this way.
The mortgage stress test is a safety feature put in place by Canada’s federal banking manager with the intent to ensure that you will still be able to pay your mortgage even if mortgage interest rates go up. It’s a bit like carrying an umbrella when it looks like rain only way more important because who cares if you forget an umbrella and get a little wet? But imagine your regret if interest rates went up to a point where you could no longer afford to live in your home! The change to the stress test endeavours to give home owners more room for upward fluctuation – a very real possibility given how unusually low mortgage rates are today.
The current stress test, implemented in 2018, requires home buyers to prove that they can handle a mortgage at a rate that is either 2 per cent higher than the lender’s rate or equal to the five-year benchmark rate published by the Bank of Canada — whichever is higher. The Bank of Canada’s benchmark was 4.79 per cent at the time. As of June 1st, that number will increase to 5.25 per cent.
What this means practically speaking is that you may not be able to borrow quite as much money as before. For example, if you are approved today for an uninsured mortgage of $1 million (with a down payment of 20 per cent or more), as of June 1st that number will be $955,000. Similarly, if you’ve been approved for $500,000, that will decrease to $480,000.
Although this looks like it takes away some of your buying power, it does the same for everone in the house-buying market. Rather than prohibiting you from buying a house, it may slow down the competition, and it may over time rein in some of our most out-of-control real estate markets.
What can you do about it? What every successful home buyer has done in the past. Beef up your down payment by cutting your spending, save as much as possible, make sure your credit score is as high as it can be, consider the bank of mom and dad to help top it up, and reach out to a mortgage broker with any questions you have about financing and affordability before you find your dream home!