By: Rebecca Rosenberg
Effective June 1, 2021, the federal government has implemented a higher bar for the mortgage “stress test”. The amended stress test will now be set at either the higher of 5.25 per cent or two full percentage points above the borrower’s current mortgage rate. While the new level is only half a percentage point higher than it was before (previously 4.79%), buyers’ purchasing powers are expected to be cut by about five per cent.
The mortgage stress test was introduced in 2017 in an attempt to cool demand in Canada’s searing housing market. The test is used by the banks to ensure that homebuyers can keep up with their mortgage payments amid rising interest rates without sinking into debt. Presumably, the changes were made to offset the current decline in interest rates due to the COVID-19 pandemic.
Here’s how the test works: if you have a $400,000 mortgage and your interest is at 1.8% on that mortgage, you are paying a yearly interest of $7,200. If you want to refinance your home or take out a new mortgage, according to the new stress test, you will have to be able to withstand your interest payments at the higher of the two previously mentioned rates. If you end up falling under the 5.25 per cent level, then you must qualify your mortgage at that interest rate for an amount of $21,000 a year instead of $7,200.
Contrary to the government’s purported aim for changing the test, critics have expressed concern that the increased percentage will alienate buyers, especially first-timers, from an already tumultuous housing market.
If the goal is to cool down the market, amending the stress test only treats the symptoms and not the cause. Increasing pressure on buyers won’t lessen demand. There are a host of other factors that contribute to supply and demand in the housing market. These factors include issues, such as international buyers and immigration, neither of which will be slowing down anytime soon.
Nevertheless, the new stress test is here to stay. That is why it’s important now more than ever to ensure that you qualify for a mortgage before you enter into a purchase and sale agreement. Otherwise, you’re on the hook for a contract you may not be able to afford.