June 1, 2021 marks a significant day in the real estate industry in Canada as the federal banking regulator (Office of the Superintendent of Financial Institutions) is enforcing tighter rules on the Mortgage Stress Test. More specifically, the minimum qualifying rate for mortgages will rise to either the contracted rate plus 2% points – or 5.25%, whichever is higher. This number is up from the previous five-year benchmark rate of 4.79%. So, what does this mean for Canadian homebuyers? First let us get a clear understanding on what exactly the mortgage stress test is.
MORTGAGE STRESS TEST
Since 2018, all Canadian home buyers who are applying for a mortgage from a federally regulated lender are now required to pass the Mortgage Stress Test. This test serves as a way of ensuring that home buyers are able to comfortably handle their mortgage payments in situations where their finances may be compromised - such as job loss or a potential increase in mortgage interest rates. In turn, this helps to ensure that homebuyers are not taking on more debt than they can handle.
In order to pass the Mortgage Stress Test, one will need to qualify at the contracted mortgage interest rate plus 2%, or 5.25% - whichever is higher. When preparing for the Mortgage Stress Test, lenders will look at two main calculations to assess your financial situation – the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS).
GROSS DEBT SERVICE RATIO
As a general rule your monthly housing costs should be no more than 32% of your average gross (before-tax) monthly income.
TOTAL DEBT SERVICE RATIO
As a general rule, your monthly total debt load should be no more than 42% of your average gross (before-tax) monthly income.
HOW DOES THE RECENT CHANGE AFFECT HOME BUYERS
It is important to note that the recent increase of the Mortgage Stress Test rate will apply to both conventional mortgages (those who have a down payment of 20% of the purchase price or higher), as well as insured mortgages (those who have a down payment of under 20% of the purchase price). Ultimately this increase will make it more difficult to qualify for a mortgage in the short-term, with a recent news article by Global News stating that the changes “reduces the amount of mortgage a household can qualify for by about 5%.”
NOTE: The OSFI has stated that anyone who secures their mortgage pre-approval prior to June 1 will, at the discretion of OSFI, be allowed to be grandfathered into this current stress test rate.
IMPORTANCE OF CHOOSING A REPUTABLE LENDER
Here at Cedarglen Homes, we highly recommend that our home buyers choose to lock in their mortgage with a reputable lending institution such as one of the big 5 main banks in (Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Canada, Bank of Nova Scotia, and TD Canada Trust).
Other mortgage lenders or credit unions may not always be held accountable to the federal banking regulations, and therefore you might be able to avoid the Mortgage Stress Test when applying for a mortgage. However, these lesser-known institutions often come with a few more bumps in the road that may not be worth gaining an extra 0.1%-0.25% on your interest rate. With the current heated housing market in the City of Calgary, using one of the bigger banks ensures that you can hold your rate for up to one year, which is important should the required construction build time be extended. As a longstanding builder in the Calgary housing industry, Cedarglen Homes can vouch for the security and peace of mind that will come with choosing a reputable lender that will help streamline your purchasing journey.
Contact our preferred RBC Mortgage Specialist below:
Cheryl Mills, Mortgage Specialist
Royal Bank of Canada