The Stress Test: What to Know If You're a Home Buyer

| Buying

If you’re planning to buy a home in the not-so-distant future, there’s a good chance you’re wondering about the mortgage stress test. Changes to the rules took effect on June 1st, and buyers have been trying to figure out how they might be impacted ever since. Fortunately, it’s not nearly as complicated as it may seem.

Here’s what every home buyer should know about recent changes to the mortgage stress test…

What is the stress test?

The stress test was introduced by the Office Superintendent of Financial Institutions in 2018. Its purpose was (and is) to help ensure that Canadian home buyers are able to meet their mortgage payment responsibilities—even if interest rates rise. Essentially, the test consists of guidelines that tell lenders how much financing they can give buyers.

Prior to June 1st, purchasers had to prove that they could continue making payments if interest rates rose by two percentage points or 4.79 per cent (whichever of the two is higher). That’s since changed.

Now, the qualifier is two percentage points above the contract rate, or 5.25 per cent (again, whichever sum is higher). This change applies to uninsured mortgages, as well as those that are insured. Needless to say, this is impacting the purchasing power of many home buyers.

Why the rules are tightening

The real estate market has been incredibly hot in recent months, especially in the country’s biggest cities. Tightening the stress test can have a cooling effect, making homes more affordable in the long term.

The result (hopefully) is a balanced market. Under these conditions, buyers tend to make reasonable offers. Properties don’t sit on the market too long, nor do they inspire frenzied bidding wars. Prices grow at a slow and steady rate.

While the stress test is one measure that can help achieve this goal, there’s a major downside. Buyers (especially first-timers) find that their purchasing power is temporarily diminished. Unfortunately, some may even feel that they’re priced out of the market.

How the stress test will impact your purchase

If you’re buying now and on a budget, recent changes to the stress test may have you feeling discouraged. While it’s true that your buying power will be reduced, you may not be as impacted as you think. Unless you have a high debt-to-income ratio, you’ll likely still be able to afford your dream home?

If you do have a higher ratio, it doesn’t mean you should give up on your dream of homeownership. A real estate professional with a track record of local success can help you explore your options—and hopefully find a wonderful home that will meet your criteria!

If you’ll be buying in the near future, don’t expect the stress test to lead to a major drop in prices. After all, there are many market factors at play. The good news is, this measure could help cool things down a little bit—which may mean slightly greater affordability. Either way, working with an agent who knows the local market is your best bet.

For more tips and information on getting a mortgage check out this blog post.

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