The much talked about and strict stress test for insured and uninsured mortgages has come into effect from June 1, 2021. According to the new rules, which were first announced last month, the minimum qualifying rate for uninsured mortgages will now be at a revised figure of 5.25 % (which was earlier 4.79%). This will apply to mortgages with a down payment of 20% or less. The new rules will be applicable to homebuyers who are renewing a mortgage or those individuals who are applying for a fresh mortgage. Amid the new rules it is the first-time home buyers who will feel the impact the most. It will be the onus of the borrowers to prove they will be able to afford the payments towards their mortgages if the rates were increased.

This implies the purchase power of home buyers/borrowers is bound to decrease. This step has been taken by OSFI, Canada's bank regulator in view of the overheated market. Even though the sales of the housing sector had begun to lose steam since April as the sales fell by 12.5% as against the record breaking sales in March.

According to a statement, OSFI’s Assistant Superintendent for Regulation said that the new rate, "will help support financial resilience should economic circumstances change.”

The effect on house prices

The prices of houses will not be impacted as such by the new rules alone. Since the rates are still low, demand will still remain a factor in determining the impact on prices. But when the covid curbs are eased and immigrants move to the country the demand for housing will go up once again and the market is likely to heat up again.

What can borrowers do?

Pay off your debts: Since debt is one of the major factors of the stress test, the banks are likely to assess the debt-to-income in order to check the amount of mortgage you can afford. Naturally you should aim at paying off as much debt as possible (and in the ideal scenario be debt-free) as this will increase the chances of your mortgage approval.

Take a private mortgage: Banks are not the only ones lending money so you can find a private lender if your mortgage does not get approved by traditional lenders. Private lenders are not economically viable as they charge higher interest unless it is a family or a friend who is giving you a good rate.

Past learnings

The last time such a stress test was introduced the purchase capacity of homebuyers decreased by 20% in 2018. But before the rules came into effect, there was a spur in home buying. But it was also seen that homebuyers adapted quickly to the new rules as they sought co-borrowers, got help from parents, and were even okay with buying smaller houses.

If you are looking to apply for a mortgage or have been affected by the new rules, and are looking for advice, do reach out to LendX.