Canada’s mortgage stress test is about to become a lot more stressful.
Starting tomorrow (June 1st), new rules will raise the minimum qualifying rate, which gauges whether buyers can afford payments should interest rates increase.
The minimum rate for uninsured mortgages (mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus two percent or 5.25 percent, whichever is higher.
The stress test currently has a minimum qualifying rate of 4.79 percent, nearly 50 basis points lower.
Basically, this means it’s going to be harder to qualify to buy a home.
Debbie Simmonds is managing broker of eXp Realty in Chemainus. She says the new rules are going to have a domino effect.
“You have to have a lower debt ratio, a higher down payment just depending on what product you are going after and what phase or season of life you’re in, and you have to qualify at two percent higher than you’re actually borrowing at,” she explained.
For example, if you were qualified to borrow $500,000 today, as of tomorrow, your purchasing power will only be $450,000.
Simmonds says she is already seeing the impact, noting that the local market activity dropped 33 percent in one week.
“It has peaked all over Canada, and it is coming down quite quickly,” Simmonds said. “Buyers have retreated. The ones who couldn’t get in are trapped out of the market and now they have an even more difficult time getting their lending.
“Even though we are starting now to get more inventory, and by its very nature there will be more inventory, because there are fewer buyers they may not be able to buy based on their mortgage qualifications, so it (has a) multiplier effect on the market.”
The Office of the Superintendent of Financial Institutions (OSFI) says it’s clear that there is a wide range of issues facing homebuyers, including high indebtedness, rapidly rising home prices, housing supply, and competitive bidding.
“With the finalization of this consultation, OSFI is also launching a new process to review and communicate the qualifying rate at a minimum annually, every December,” it added.
“This timing is set well in advance of the high-volume spring housing market.”
Simmonds says when the government does this, “it’s like a switch goes off” and the economy contracts immediately “and that’s exactly what happened last week.”
She added that a lack of supply is only making things harder.
“We’ve got developers walking away from developments that they’ve put five years of due diligence into, and going ‘no, we just can’t do this anymore. It is too difficult to deal with these local governments.’ And they walk away from the project after five years of due diligence, so that tells you how difficult it is for developers in this province to get anything off the ground,” she said.
“So the supply is being choked there. And supply was being choked on the other end because people were terrified to list their houses because if they got trapped without purchasing somewhere else they would end up homeless and this has been a real problem for the last two years.”
Now, Simmonds believes the new rules will push many buyers out of the market as of tomorrow, and homes could sit on the market for months.