New Mortgage Stress Test

For months we have been witness to a sizzling real estate market in Vancouver and the Fraser Valley. Not only has it been a home buying frenzy locally, but home sales are up across Canada and house prices have increase by almost 25% nationwide. In Metro Vancouver, we have seen bidding wars and many families having to over extend their finances in order to have a chance to win the negotiation. In my previous blog, I shared a story of how a local couple had to downgrade their dream of purchasing a detached home in favour of a townhouse as it was a better fit their monthly mortgage budget. Come June 1st, other couples in the similar position or many first time home buyers will be faced with a new stress test.

How will the new stress test affect mortgage approvals?

The new stress test rules coming into effect for June 1, 2021 will have an impact on homebuyers with both insured and uninsured mortgages. For those that may not know, a stress test is a “what if scenario” and in this case, it’s what if the interest rate were to increase by two percentage points? Would the homeowner be able to afford their monthly mortgage payment?

The new qualifying rate for a residential mortgage will increase by either two percentage points over your contracted rate or default to 5.25% (which one is higher at that point). A homebuyer who has a mortgage approval based on the five-year benchmark rate, needs to outline and prove that he/she would be able to afford a mortgage payment should the interest rate increase by two percentage points. The overall effect of this change could mean that most mortgage seekers would qualify for a mortgage amount that is approximately 5% lower after June 1. As an example, a mortgage seeker that would normally qualify for $600 before June 1 will be reduced to approximately $573k range under new qualification rules.

What’s Next?

As far as mortgage rates go, they remain at all-time lows and continue to bring many buyers into the market by providing them additional buying power in many cases. Having a mortgage payment at 1.79% compared a 2.95% (not too long ago) is a big difference maker for many families and in some cases allowing them to get into home ownership sooner or providing them the privilege to look a more amenities within their ideal home. The bidding wars during pandemic times were not predicted by many and have altered the monthly payment picture slightly. Now combined with the new stress test, some new home shoppers will see an approval that is around 5% lower which once again may require an adjustment to their overall family budget and home affordability.

With the hot house buying competition and the new stress test, having a robust mortgage plan is more important than ever. There are some other variables to be aware of with the new qualification rules and I would be more than happy to share when discussing your own customized mortgage solution. I invite you to connect with me at anytime to learn more about how we can get you on the path to planned home ownership sooner.

All the best,

Sukh Sangha