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Mortgage Qualifying Stress Test Rate Possible Increase
Dated: April 29 2021
What is the Mortgage Stress Test?
When homebuyers apply for a mortgage, lenders must check their ability to make their payments based on the qualifying stress test rate of 4.79%, even if the one they are offering is lower. Today, the federal government is proposing to raise that rate to 5.25%.
Although not confirmed, the increase is planned to be effective on June 1, 2021, and would, for now, only concern homebuyers applying for uninsured conventional mortgages (typically those with more than a 20% down payment).
What Does the Increase Mean for Homebuyers?
In short, it means borrowers who will put down more than 20% deposit will need to prove that their finances can pay for the mortgage at the new qualifying rate of 5.25%.
Let’s illustrate this with an example of a $300,000 mortgage with a 25-year amortization period.
|Interest Rate||Monthly Payment|
|Lender rate of 2%||$1,270.35|
|Current qualifying rate of 4.79%||$1,709.35|
|Proposed qualifying rate of 5.25%||$1,787.35|
In this scenario, borrowers must prove they can afford monthly payments of $1,709.35 although the real mortgage payment is $1,270.35. With the increased qualifying rate, they would have to prove they can cover $1,787.35 monthly payments.
Also, the maximum amount they will be able to borrow will decrease by 4.5% . For example, homebuyers that were preapproved for a home valued up to $630,000 will now see that preapproval reduced to approximately $600,000.
Mortgage Broker Lucie Hallé from The Mortgage Group recommends buyers to schedule a meeting with a specialist to discuss different scenarios to minimize the impact. She also informs us that once the change is effective, preapprovals for conventional mortgages will become void. Applicants will have to reapply under the new stress level.
What Does the Increase Mean for the Market?
When the stress test was first introduced in 2017, the increase applied to all types of mortgages and the qualifying rate meant an average increase of over 2% to qualify for the loan. Homebuyers went into a frenzy trying to acquire a property before the stress test was effective.
Will we see that same scenario next month? We are in a different market than the one in 2017, the increase is minimal (0.46%) and only concerns uninsured conventional mortgages. That being said, Mrs. Hallé confirms they are seeing a rise in mortgage applications at her firm. Is the rise linked to the increase or just the normal industry behaviour for Spring in a hot market?
In conclusion, the impact the new level will have on homebuyers should be modest compared to when the stress test rate was first introduced. Let’s not forget that those who are impacted by the increase could reduce their down payment to 19%, for example, and have a mortgage insured by CMHC.
Stakeholders have until May 7th to submit feedback, and lenders don’t know if the increase will apply to high ratio (insured) mortgages as well. Any final amendments to the qualifying rate will be communicated by May 24, 2021.
We would like to extend our thanks to Lucie Hallé for fact-checking this article and providing us with reliable financial information.
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