Applying for a mortgage for most homebuyers is a daunting process as it’s usually a lot of money. A property is a significant asset, and for most people, it is the largest asset they will ever own. However, most homeowners can only afford to buy their property with the help of a home loan.
Lenders will approve mortgages of up to 95 % of the sales price, but there are buyer conditions that include mortgage insurance. To avoid adding more costs, to the home purchase smart homebuyers work hard to contribute 20 % of the sales price; however, rising house prices have made this goal a lot harder. For example, with a purchase price of $500,000, a lender would require the purchaser to contribute $100,000 (20%) and then the loan amount would be $400,000. If the borrower was adding, say 10 % or $50,000 they’d also have to pay between 2.80 and 4% so at the upper level in our example that would be $20,000.
Borrowing a sum, this size does make borrowers nervous, as it’s not an everyday occurrence. In our example borrowing $600,000 is probably at least three or four times the annual income of the borrower and in some more extreme cases, the home loan can take five times or more than the mortgage holder’s yearly salary.
In Canada, it’s been interesting times in the real estate market for the past few years. Immigration has played it’s part creating a housing crisis, in much the same way it has in other countries in Europe and the UK. House prices were inflated, and property snapped up by non-citizens.
The Canadian government, however, made changes including in 2018 the requirement that all mortgage holders both insured and uninsured take the mortgage stress test. This action made it immediately harder for homebuyers to qualify for a loan and there was also the introduction of a foreign buyers’ tax. It comes with some relief, now the heat has gone out of house prices, that a revision of the mortgage stress test rate has been approved.
Mortgage Stress Test Change
Ottawa finance minister, Morneau received a great many requests to simplify the mortgage stress test to reflect actual market conditions better. From April 6, the rate is benchmarked against “the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two per cent.”
The mortgage stress test requires homebuyers to have more funds than their contracted repayments. This is to prove their ability to service their loan when there is a substantial interest rate rise. The benchmark now is that they could service two percentage points higher than the weekly median five-year fixed insured mortgage rate.
Matching the rate closer to actual market conditions is fairer and will allow more first home buyers to get on to the property ladder and thus into the housing market. What isn’t changing is all mortgage holders are stress-tested whereas before 2018 on borrowers contributing less than 20 % were stress tested.
In the first quarter of 2020, there is a slight unease in the Canadian property market that is caused mostly by changing customer demands, expectations, preferences, and, last but not least, behaviors. Other factors worth mentioning are policy changes and geopolitical uncertainty.
Housing Market Boost
Not many people knew that the mortgage stress test of 2018 caused a decline in property sales throughout 2018 and early 2019.
Some areas like Toronto were more resilient, and as such, the test’s change is unlikely to have much impact. Whereas from 6 April expect to see more listings and sales in areas more reliant on attracting aspiring homebuyers.
The relaxation of mortgage rules is one of a few new incentives that are sure to give Canada real estate a much-needed boost. Homes will sell a lot faster and, most importantly, the days on the market are reduced. Changes in mortgage requirements will considerably influence a person’s ability to acquire a residential property, especially when the purchaser can also take advantage of drawing funds from an RRSP or a CMHC interest-free loan.
All in all, the stress test change is somewhat underwhelming, but it’s certainly one that’s helpful when you’re on the verge of entering the Canadian real estate market.