If you’re in the market for a new home or follow real estate news, you’re likely aware of Canada’s new mortgage stress test rules which came into effect on June 1st. The new rules were announced by the country’s banking regulator in May as a strategy to help cool the country’s overheated housing market and protect buyers from skyrocketing costs in a low interest rate environment.
These changes impact how much money banks can lend to prospective homebuyers, based on how much a mortgage applicant can pay back if interest rates were to climb.
New qualifying rate
If you’re buying a home, this means that the mortgage stress test requires a bank to check that you will still be able to make your mortgage payment at a rate that is higher than what you actually pay each month. Even if you qualify for the lowest mortgage rate, your bank will run affordability calculations for two different rates:
- 1.78% (your contracted rate) and
- 5.25% (the new Bank of Canada qualifying rate).
“The qualifying mortgage rate has increased from 4.79% to 5.25% and it is inclusive for all homebuyers, no matter how much money they have for a down payment”, says Vicky Collins, a Mortgage Specialist with RBC in Innisfil, Ontario.
Vicky explains that all uninsured mortgages (where borrowers have a down payment of at least 20%) and insured mortgages (below a 20% down payment) must be approved at the higher qualifying rate of 5.25%.
She provided an example of what the new rules look like in numbers:
Consider a couple in the market for a home with a combined annual income of $100,000, and no debts.
Under the old qualifying rate of 4.79%, this couple would qualify for a mortgage amount of $535,000.
With the new qualifying rate of 5.25%, this couple now qualifies for a mortgage amount of $510,000.
What are the impacts?
While the new stress test rules lower a homebuyer’s purchasing power, Vicky says house hunters shouldn’t get too dismayed.
“These rules are in effect for the right reasons,” she says. “Buyers may feel discouraged, but this is for their protection in the likely case interest rates go up in the future. The rules are in place to set people up for success in worse-case scenarios, so they can still afford to pay their mortgage or not be forced to sell in a market that isn’t strong.”
With the average price of a single-family freehold home in Canada at a whopping $716,000 in April, Vicky says the new rules will have the most impact on first-time home buyers who may not have a lot of money for their down payment, and who don’t have assets.
She says it can also affect homebuyers who are living on a restricted income, such as retirees who wish to size down or move to a more suitable home for their needs. Even homes in small urban centres are in high demand and have experienced a surge in pricing not unlike Canada’s larger cities.
Land lease is a more affordable option
With homebuyer’s purchasing power more limited, Vicky says she is educating more people about residential land lease.
“Land lease is much more affordable option for homeownership”, she says. “I refer many of my younger clients to land lease home listings because they have a more reasonable purchase price.”
Vicky has arranged mortgages for a number of buyers who have moved into land lease communities in recent years and says the process is quite similar to buying a freehold home.
She’s excited about future land lease developments, like the Parkbridge community of Point Endeavour in Innisfil, as it will offer a range of options for both families and those close to retirement.
“A buyer should be mindful that land lease homes come with monthly lease fees and need to be considered in these types of mortgages, as they will decrease the overall qualifying amount,” she explains. “But the thing I really like about land lease is that it allows clients to own their home even though they don’t own the land. It gets them into the housing market, and they can always sell later, as with any home.”
Some of Vicky’s clients have been feeling overwhelmed by the current hot housing market, so she has counselled them it may be worth waiting for the market to settle down.
“We don’t expect to see major changes soon, but things are likely to cool off,” she says. “My advice is that it’s ok to slow down. Don’t panic, and understand that in many circumstances, you don’t have to buy a home right away.”