According to the Canadian Financial Regulator, the Canadian real estate will undergo a mortgage stress test in June 2021. The affordability test implies that mortgage applicants will have their borrowing capacity intensely scrutinized. Approximately 5% to 20% of homebuyers’ buying power may decrease according to the OSFI (Office of the Superintendent of Financial Institutions). According to the report, April house sales dropped, while March was filled with promising deals. It was expected that the interest rates might go soaring high and to keep the houses affordable, this step has been taken. A drop of 12.5% was recorded in the number of homes sold in the market prior to this announcement. This follows the positive growth of mortgages seen at the beginning of the year. GTA (Greater Toronto Area) real estate sales prices declined from $1,090,992 on average to $1097655 according to Toronto Regional Real Estate Brand.
In Canada, where many homeowners are buried in debts, they are unable to pay back, this test will help deal with the rising home debt crisis. Both interest rates and housing prices are expected to rise in the coming years. The main purpose of such a situation is to test a person’s financial management. If there’s a sudden rise in the interest rates or there is some other financial emergency, will the repayments of the mortgage be made by the people or not? The entire test is designed to provide challenging conditions for those applying for home mortgages to prepare them.
What Are the Consequences?
This policy will have an impact on uninsured homebuyers or those with down payment of 20% or more. Buyers who don’t need to pay mortgage insurance for the down payment of 20% or more will now have to prove that they can afford a high interest rate of 5.25% as part of their loan approval process. This test implies that now for uninsured mortgages, the qualifying rate is set to be 5.25% or 2% above the contract rate; high in both cases. Similarly, the insured and uninsured borrowers will have the same qualifying rates. The government plans to work with the regulators on establishing them. It equally affects the affordability of almost everyone regardless of their income bracket in one way or the other. But first-time homebuyers might be at a disadvantage since they are making an attempt to enter the market for the first time and hence will need to prepare for more impact from it.
Policy will never affect the market price of houses in a negative way, therefore keeping the owners in a good position. A similar policy implemented in 2018 decreased the buying power by 20%, but house-buying activity had increased before the policy was implemented. The same dramatic behavior has not been witnessed this time. However, all of this does not mean you have to give up your dream of buying your first home. It may not completely eliminate your option to buy a home, but it may reduce the options that you can contemplate as your future home. With the assistance of an expert mortgage agent, you can still fulfill your dream of owning a home. They can still help you secure your dream home due to their extensive knowledge of mortgages. A mortgage agent can gauge your situation based on several factors, which include Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS), which factor in income and debt from your home. The first step in preparing for the test would be to pay off as much debt as you can in order to lower your TDS. For example, you can start by paying off your credit card bills. Make sure your home is financially comfortable before choosing it. You might prefer a smaller house if it fulfills your needs, rather than becoming a poor house owner.
Although the market has cooled down and many buyers feel that their buying power has dropped, you shouldn’t panic as long as you manage your finances well. The stress test is here to stay, and only time will tell how it impacts the people in the long run.