What is this new B-20 legislation I have been hearing about?
B-20 implements a new stress test that basically has borrowers prove that they can handle a 2% increase in their monthly payment obligations during the term of their mortgage. The idea of the stress test has already existed in the industry for some time (in the past it was only applied to people purchasing homes with less than 20% down payment) now the standard will be applied to all purchasers, no matter their down payment, and even those looking to refinance their existing mortgages.
How does the stress test work?
Potential homebuyers will be tested against the greater of the following two:
The Bank of Canada’s five-year rate - currently at 5.34% (as of October 2018)
The rate offered by your lender plus two percent
As an example, if your lender’s rate is 3.2% you would be tested against a rate of 5.34%. As it is the higher of the two.
Who has been affected by the stress test?
Now that B-20 has been enacted, everyone, even those purchasers who have more than 20% down payment, will have to qualify based the new government guidelines. The effects of the new rule change at the end of 2017 are still being felt, but predictably, the rule change accomplished its goal of slowing down the out of control pace of increasing home prices in the major markets in Canada.
These changes lower the purchasing power that home buyers had in the past, potentially lowering price affordability on a home by up to 20%. This means that potential homeowners may need to lower their expectations of the price of a home that they can purchase.
How does this affect the homebuying?
The Bank of Canada has begun to raise interest rates, and this combined with the tougher stress test qualification standards, has put a fairly significant dent in some people’s ability to borrow money. This leads some buyers to either change their planned purchase price or delay a home purchase.
That’s all well and good, but how does it really affect me?
One unintended consequence of the new rule changes is that more buyers will be forced to compete for condos and townhomes, which traditionally have smaller price tags, and this competition will drive up the cost of these properties. Moreover, the homes which will feel the biggest pinch are the big ticket homes whose purchaser demographic will be forced to look for properties with smaller price tags.