With real estate markets soaring cross-country, thanks to pandemic-fueled housing hunts, there has been growing pressure on policy makers to step in to cool overheating markets. The combination of low interest rates and the fear of missing out, pandemic style is testing the bounds of affordability.
In a city like Toronto, where affordability is already stretched to the brink, that can be problematic. But as Urbaneer’s go-to specialist, Mortgage Jake, tells us, the proposed policy solution may indeed end up being part of the affordability problem.
So how exactly are they "renovating" the mortgage stress test?
OFSI announced on April 8 that they will be making changes to mitigate vulnerability with overleveraged buyers in the face of rising housing prices. They are raising the minimum qualifying rate for uninsured borrowers (usually more than 20 per cent down) to 5.25 per cent. These changes will take effect on June 1, 2021.
Here's a great Globe & Mail article called, "Bank Regulator Proposes Tougher Mortgage Rules" as well as the CBC's take on the amendment: "Bank Regulator Raises Mortgage Stress Test Level, Making It Harder To Qualify For A Home Loan"
Massaging the stress test in this way could have a significant impact on multiple markets - especially in Toronto - as Mortgage Jake explains below!
"The STRESS-TEST measure which was introduced in 2016 was designed as a buffer to offset against rising interest rates (LOL). The opposite happened with the pandemic (yay?). It has caused house prices to go bananas and was never really in sync with reality.
Today, it's not even on the same planet.
OSFI (the powers that decide how banks run their business on the lending side) just INCREASED the stress-test rate to 5.25% and also increased my already high blood pressure.
Let's look at an example of how this affects a typical borrower. Let's call our borrower Judy.
Judy makes $100,000 a year at her consulting job.
Judy has a 10% down payment so needs a CMHC-insured mortgage.
Judy wants a condo with $2000/year taxes and $400/m condo fees.
Today, Judy can qualify for a mortgage of $484,000 plus her down payment.
As of June 1st, when this stupid stress test comes out, $465,000 is her max borrowing power.
It'll affect Judy by about 4% LESS in a market that is NOT seemingly going down.
If Judy has 20% down, she still has to qualify with the stress test.
Today she can qualify for $552,000
As of June 1st: $525,000
This is just a proposal. However, it's kind of like when your parents proposed to you that you're not going to that party on the weekend. It's a "proposal" that is really a command.
This is the culmination of too much pressure on the Government from the banks - one of which stupidly said " break the psychology of buyers to cool housing" (BMO). What I find strange is - the banks are more than happy to dish out loans left right and centre, but then want to crush the housing market which is responsible for 25% of our GDP. Hypocrisy.
If I'm to read between the lines, the stress-test change tells me one thing. The banks are super nervous about rising interest rates upon renewal. They must be making sure that people will be able to afford rates in the mid 3% range in order to qualify for a mortgage today (which they are locking in at mid 1% range).
It's REALLY BAD optics though. Especially for first-time buyers.
June 1st - mark your calendars!"
Stay tuned - we'll keep you updated with any major changes!!
One thing that many people forget, is that real estate is a leveraged investment with variable-namely interest rates and market volatility. Now more than ever, it is crucial to engage a prudent, well-researched strategy when buying a home.
With 28 years of navigating Toronto’s real estate trenches, may I and my team offer our experience and gently guide you on your best path forward?
We are here to help!
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u can secure the right property.
Thanks for reading!
-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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