The housing market has experienced an unprecedented and unexpected boom amid the COVID-19 pandemic. There have been countless stories of how first-time home buyers and young hopefuls are being priced out of the market, and even many industry professionals from Canada's big banks have recognized the unusual overheating. Over the last few months, there have been calls for the Canadian federal government and the Bank Of Canada to intervene and implement measures to effectively cool the market.
As of June 1 st 2021, the new Canadian mortgage stress test rules took effect. This means that the minimum qualifying rate for a mortgage has changed from the previous 4.79% to 5.25%. This new qualifying interest rate has reduced the purchasing power of most borrowers by 3 to 5%. It essentially reduces the amount people will be able to spend as a maximum on their mortgage.
But does the new mortgage stress test solve the problem of Canada's increasingly unsustainable housing market? And will the stress test rate help to calm the market enough that.
Let's take a closer look at how the new stress test works and who it impacts. If you want to see how it impacts you directly, try our comprehensive mortgage calculator.
The new Canada mortgage stress test will affect Canadian home buys who are applying for a new mortgage or renewing an existing one. Stress testing at these new interest rates will sooner impact those with a variable rate mortgage, as opposed to those with a fixed-rate mortgage.
The Canada qualifying rate for uninsured mortgages, where the down payment is 20% or more, is now either two percentage points above the contracted rate, or 5.25%, whichever is higher. As of right now, this does not apply to insured mortgages.
As an example, effective June 1st, a family with an annual income of $150,000, with property taxes of $4500, will see their maximum amount for an amortization period of 25 years fall from $772,000 to $738,000.
The fact of the matter is that these new mortgage rules and stress tests alone will not do much to reduce housing costs in Canada.
One of the biggest issues that plague the market conditions today is the lack of transparency in the offer process. Many hopeful buyers have lost out on their dream homes in blind bidding wars, while others have taken on a substantial and risky amount of debt payments in order to get into the market.
The supply side of real estate is definitely another issue, but cannot be solved as quickly as the implementation of regulations surrounding offers. By putting these types of rules in place, housing would increase at a more gradual pace as opposed to this rapid growth we have experienced over the last year.
When potential home buyers are looking to make an offer on a home, a real estate agent will often tell them to put their maximum willingness forward. Conditions and clauses would previously protect the buyer, such as a home inspection or a few days to explore their mortgage options. Now, those standards have completely gone out the window.
Many people are finding it increasingly difficult to compete when sellers are entertaining multiple cash offers with no conditions. Offers of this nature are subject to a fair amount of risk and other debt payments down the line - but it is slowly becoming the new standard of the market.
Did you know that when mortgage lenders, whether that's financial institutions or private lenders, lend on the appraised value or the sale price of a home, whichever is lower? So essentially, if a buyer makes an offer well over asking, and the value is not supported, they will have to make up the difference of the purchase price in CASH.
And while there is the potential of borrowing enough money from unsecured sources, such as credit unions, any type of unsecured home loan can throw your entire scenario offside and put you into dangerous financial strain.
While the mortgage stress test will undoubtedly remove some buyers from the market, it seems like those who are greatly impacted will be first-time home buyers. Many of these individuals have spent years saving for a down payment and are eligible for the lowest mortgage rates, but they will continue to be isolated from the housing market due to the blind bidding wars. The stress test doesn't help.
Now imagine the Bank of Canada were to work with Canada's Realtor Association to change the process from blind to transparent. What would happen, first and foremost, is that the large gaps between offer amounts would shrink immediately as buyers would no longer have to wonder or blindly guess what a competing offer may contain. Instead, they can simply view a spreadsheet that is updated as offers are registered. This way, when you put your best foot forward, you can see everyone else's shoes.
A transparent process also eliminates offers that are far off from being successful. If the registered offer values are above the maximum you are willing to spend, you will save yourself from the mental angst of waiting to see if your home dreams can come true.
Becoming a homeowner is arguably one of the top milestones in one's life. Throughout this latest housing boom, many people are so tired of losing out on the offer process that they one day wake up and say "screw it, out all the chips in".
Here is a multiple offer scenario of three offers: The home was a detached property in North Burlington. Offer 1 was $5000 below asking, Offer 2 was at full price. Offer 3 was $80 000 over the asking price. While Offer 3 will never know what #1 and #2 looked like, they overpaid. To the tune of $79 000 or about an additional monthly payment of $300 for 25 years. Multiply that by the number of multiple offer scenarios and you'll begin to see the problem.
It has recently been argued that the unsustainable growth in hosting prices could directly impact our quality of life. Household income has not increased at the rate of housing, and in order to afford a monthly mortgage payment, many are allocating the majority of their monthly income towards homeownership. This doesn't leave much room in the monthly budget for student loans, car payments or any other type of unexpected expense.
Prior to the June 1st enactment of the new rules, the mortgage industry saw a huge amount of panic buying. As a mortgage broker wanting to help mortgage applicants get secure the best interest rates, I am also aware of how interest rates are only one part of the equation.
Changing the qualifying rate of mortgages will only reduce these winds from 1000km/h to 950km/h. We shouldn't be making it more difficult to secure a mortgage loan or maintain the current mortgage with a financial institution - instead, it is time for our Government to work with Canada's Realtor Associations to fix the offer process.
In scenarios where supply and demand were closer to equal, an intervention was not needed. It is past time we explore a solution that doesn't make a mortgage impossible to maintain.
If you are a first-time home buyer and looking for a competitive mortgage rate, contact Circle Mortgage Group today. Our team would be more than happy to help you explore your options.