How the new mortgage 'stress test' will affect homebuyers

Toronto -

In an attempt to try and cool down the overheated housing market, the federal government is making it tougher to get a mortgage starting June 1.

The new stress test was announced by the Office of the Superintendent of Financial Institutions on May 20. Starting Tuesday, the new calculation of the minimum qualifying rate for uninsured mortgages will be set at either the mortgage contract rate plus two per cent or 5.25 per cent — whichever one is greater.

Here's what it means for buyers.

According to lowestrates.ca, the current lowest five-year fixed mortgage is 1.69 per cent as of Tuesday afternoon. The average price of a home in Canada is $716,828 as of April 2021, according to the Canadian Real Estate Association.

Let's say a home buyer hopes to get qualified for a mortgage with a rate of 1.69 per cent in order to buy a $716,828 home. After a 20 per cent down payment, they would need a mortgage of $573,462. With an amortization period of 25 years, their monthly payment would be $2,343.41, according to the federal government's mortgage calculator.

But given that 1.69 plus two per cent is less than 5.25, the borrower would be stress tested against a 5.25 per cent interest rate. At 5.25 per cent, the borrower's monthly payments would be $3,417.36. The borrower would need to prove that they had enough income to afford the $3,417.36 payments, even though they would actually be paying $2,343.41.

Prior to June 1, this borrower would have been tested against the Bank of Canada's five-year average conventional mortgage rate, which was 4.79 per cent as of last Wednesday. They would have only needed to prove that they could afford payments of $3,267.06 instead of $3,417.36. The pre-June 1 stress test was introduced in 2017 as part of the government's previous attempts to cool demand in the housing market.

While interest rates are currently at record lows as a result of the pandemic, they're not guaranteed to stay that way over the long term. In addition to cooling demand, the feds hope that this additional stress test will protect buyers who may struggle to make their mortgage payments if interest rates increase in the future.

But Davelle Morrison, who is a sales representative for Bosley Real Estate in Toronto, says these new rules could end up hurting first-time homebuyers, many of whom will likely have to get their parents to cosign their mortgages.

"It's definitely going to make first-time homebuyers have to rethink the budget and what they were spending in the home," Morrison told CTV News Channel on Tuesday. "I think what we might see a lot more of right now is parents being asked to cosign on properties so that their kids can actually get the property in the first place."

Morrison doesn't believe a tougher stress test to protect buyers was necessary, especially given the low mortgage delinquency rate in Canada, which is at 0.25 per cent nationally, according to the Canada Mortgage and Housing Corporation.

"Why stress test people at 5.25 per cent? Because that's the rate they won't even be paying for five, 10, 15 years," she said. "You know, when's the last time people actually had to pay a rate of 5.25 per cent for their mortgage?"

These new rules currently only apply to uninsured mortgages. The Department of Finance says it is working to apply the same rules to insured mortgages in the future.

"It is vitally important that homeownership remain within reach for Canadians. We know that we need to take energetic action on housing supply and affordability in Canada," finance minister Chrystia Freeland said in a statement last May.