Interest Rates Are Low But The Mortgage Stress Test Is Set to Get Higher
It is common knowledge by now that mortgage interest rates on both variable and fixed rates are at historically low levels. With rates this low, the number of Ontarians that have been entering the housing market have been increasing. This increase in numbers are also with current Ontario homeowners that want to explore the option of taking out a second mortgage on their property by tapping into existing equity.
Real estate professionals are advising borrowers to consider investing in properties in Ontario as appreciation has increased dramatically in the last year into the double-digit territory (some areas have seen appreciations northward of 30%.) With property value gains in these numbers, it is very tempting to try to take out either a principal mortgage on a new property or utilize equity to purchase a secondary property.
The Mortgage Stress Test Is Set to Become More Difficult To Qualify For A Mortgage - Know What You Can Afford
A few years back (2018) as interest rates were at attractive levels for potential buyers, the major banks became fearful that Ontarians may overstretch themselves when taking out a mortgage. Borrowing had become cheaper and this served as the impetus for those to seek mortgage financing.
The banks could afford to offer discounts on associated interest rates on different mortgage types. While perhaps good news for those seeking to enter the Ontario housing market, a mechanism needed to be placed to try to forecast a borrower’s ability to make the monthly mortgage payments if there were to be a change upwards in the rate.
The difference in monthly payments for an Ontario homeowner with only a 1% increase on their finalized interest rate can represent hundreds of additional dollars. Some may be able to handle the additional increase, but others could be at threat of falling into mortgage arrears and defaulting on their mortgage as a result. Banks do not want to be facing mortgage default on any scale if it can be avoided.
What Exactly is a Mortgage Stress Test?
Commonly referred to as the “Stress Test” what the banks are essentially saying is: Can you handle payments with an increase in your mortgage rate? The current rate (qualifying rate) that the banks use is at 4.79%. In effect, each borrower would be scrutinized in terms of the overall household debt ratio, degree of income, and overall price of the given property to see if payments could sustain rate hikes at this level. Currently, the qualifying rate of 4.79% is used for all mortgage types (purchase with less than 20% down payment, purchases with 20%+ down payment, refinance).
What is now in discussion: Canada’s top banking regulator has recently announced that the rate will most likely be hiked up even further to 5.25% or a full 2% higher than the current rate, whichever is higher of the two. If passed, the new qualifying rate will take effect on June 1, 2021. This will directly affect borrowers that are putting 20% or more as a down payment towards purchasing a property.
What Does This Mean for You?
If you are in the market to shop for a mortgage loan, now is the time to do so. It is also best to be in a very comfortable financial position to take on such a major loan.
What can you do to improve your chances of passing?
If in a position to do so, rush to purchase before June 1st
Pay down or pay off as much household debt.
Know your credit report inside and out.
Work to better your credit score if applicable.
For any additional mortgage advice, I am only a phone call away or a message away. I will be happy to go through your financial and credit details and let you know what your options are. Happy house hunting - secure the mortgage that will make your home purchase possible while still giving you breathing room.