Earlier this year, the Canadian Mortgage and Housing Corporation (CMHC) announced their plans to ease the mortgage ‘stress test’ for Canadian borrowers; however, the spread of COVID-19 put this on pause until further notice. More recently, the Bank of Canada (BoC) lowered its five-year mortgage rate – for the third time this year – by a total of 15 basis points (from 4.94% to 4.79%). Given that this rate is also the benchmark qualifying rate for the mortgage stress test, this will make it even easier for borrowers to get approved for a mortgage.
What is the mortgage stress test?
The mortgage stress test measures a borrower’s ability to qualify for a mortgage based on comparing salary and/or income ratios with the greater of the five-year rate set by the BoC or the rate a client receives from a lender, plus 2%. It’s a way for lenders to determine a buyer’s home affordability and their ability to remain stable in the face of unemployment and rising interest rates.
Who will this affect?
This recent cut in rates is positive for first-time buyers and homeowners who are currently looking to refinance their mortgage. For those who have been patiently waiting to buy their first home, the market is now a little more inviting with some flexibility throughout the process.
According to Statistics Canada, the median household income is $101,900, while the average price of a home is approximately $480,743. Under the old stress test rules, a family with that household income could get approved for a mortgage of $474,974 with a 5% down payment. However, with the new stress test at 4.79%, the same family would qualify for a mortgage of $495,001 with a 5% down payment on a $500,000 home. In a nutshell, this means that the family is able to afford $20,027 more than the average price of a home in Canada.
If you’re actively searching for your first home, it’s definitely a wise idea to get pre-approved to understand your financial position and if these changes really do increase your chances of affordability. At Homewise, we’re happy to help you throughout the process. Simply apply with us today and one of our Mortgage Advisors will be able to help you.