There are new changes to the mortgage stress test that will affect homebuyers beginning June 1, 2021. Moving forward, all mortgage applicants are subject to a higher qualifying rate – up from 4.79% to 5.25%. The original stress test was implemented back in January 2018, and aimed at ensuring long term mortgage affordability for homebuyers. On May 20, 2021, the Office of the Superintendent of Financial Institutions (OFSI) made the decision to proceed with the stricter qualifying rate for uninsured mortgages, which are those with a down payment of at least 20 percent. Now, the Federal Department of Finance has made the decision to apply the same change to insured mortgages which are those with less than 20 percent down.
What will the new qualifying rate be?
Affordability will be based on the greater of:
- The current contract rate (this is the rate offered by your lender) plus two percent; or
- The current ‘floor rate’ set by governing parties.
As of today, the ‘floor rate’ has increased from 4.79% to 5.25%. The new change is expected to reduce purchasing power by approximately 5 percent.
Why is the qualifying rate changing?
We have seen housing prices across the country continue to rise at unprecedented rates. With the new changes to the qualifying rate, the expectation is that buyers will now qualify for less mortgage financing which will result in less opportunity for overbidding on homes. Theoretically, this should put downward pressure on the market and cause sale prices to decrease. At a minimum, the floor rate will continue to be reviewed annually and adjusted if necessary.
How does this change mortgage affordability?
Here’s a real world example from a current client of ours:
| 4.79 percent (old rate) | 5.25 percent (rate as of June 1, 2021) |
|---|---|
|
Annual Income: $88,000 |
Annual Income: $88,000 |
|
Down Payment: $45,000 |
Down Payment: $45,000 |
|
5 Year Term |
5 Year Term |
|
Purchase Price: $450,000 |
Purchase Price: $435,000 |
Still have questions about how the new changes affect you? We can help! Contact our office today.
