Starting June 1, 2021 You Might Need To Save $20,000-$45,000 More To Afford The Same Home
Starting June 1, 2021 you might need to save $20,000-$45,000 more to afford the same home
Starting June 1, 2021 you might need to save $20,000-$45,000 more to afford the same home after an announcement last week by the Office of the Superintendent of Financial Institutions (OSFI). As of now, this only applies if you are planning to have 20% down payment or more.
What is the impact on your mortgage affordability?
You will need to save $20,000-$45,000 more on the same house since that is the approximate amount your mortgage maximum will go down by. Your buyer power is going down by around 5%.
Example:
If you were preapproved to buy a home for $500,000 with a 20% down payment before the stress test changes, you might only be qualified to buy a $480,000 home after they’re implemented ($20,000 less). Taking the same example but If your maximum mortgage had previously been $1,000,000 on a $1,200,000 home (20% down payment), after June 1 it will be $955,000 which is $45,000 less.
What is the B-20 Mortgage Stress Test?
It was introduced in November 2016 by the Government of Canada and it forces Canadians to qualify for their mortgages with an artificial buffer rate. The main reason for introducing the stress test is because Canadians carry a lot of debt. The government wants you to prove you can handle higher mortgage rates when they arrive in the future. There is a big debate on whether qualifying at a mortgage rate two percentage points higher is fair. For a deeper understanding, please watch our video on the B-20 Mortgage Stress Test.
This has no effect on your mortgage rate but how you qualify for it. For example, you might have a 1.25% variable rate on the table but you are qualified for the mortgage as if you were paying a 4.79% (soon to be 5.25% on June 1st) rate which means your monthly payment would be much higher! Higher projected monthly debt loads means you afford less when it comes to mortgage qualification.
What can you do about this?
Make sure you are saving more diligently as a hotter market and not as much mortgage means you are more likely to lose a bidding war
Since you might need more of a down payment to make up for the lower mortgage affordability, make sure to check out new first-time home buyer programs.
Stop procrastinating and get pre-approved! It could save you $10,000 in the future with a rate hold.
You may need to consider an alternative lender or talk to me about the select lenders who are not mandated to stress test and thus, help you afford up to $280,000 more than you can today.
What if I am in the middle of obtaining a mortgage now?!
Where the line in the sand will be drawn has not yet been announced (look for that in May) but based on similar situations in the past, you will be grandfathered at the current benchmark rate if your accepted offer came in before June 1st. Pre-approvals before June 1st but with no accepted offer will likely be out of luck.
What does this mean for the housing market?
It will likely heat up even more before June 1st but after that, more first-time buyers will be priced out of the market alongside blue-collar worker families which means that the market could cool off a little. Rising fixed interest rates and bidding war fatigue will also play a role in what could be a small break in this hot market.
One thing to consider is that with COVID-19 vaccines accelerating and immigration opening up more in the summer, you can bet the market will once again heat up with the same supply and much more demand.
THE BOTTOM LINE
Don’t let the media scare or pressure you if you’re not ready to buy as this process should never be rushed. However, if you are ready to buy but you like to “time the market”, you now have a hard deadline to do so - June 1st. A quote I refer to a lot that puts things into perspective is that “the market moves upwards and downwards, upwards.”
If you are 6-12 months away from buying, I wouldn’t stress too much as this benchmark rate changes often. Before the August 2020 change to 4.79%, That testing rate had already been lowered twice in the 2020 pandemic, first in mid-March when it dropped 15 points from 5.19 per cent to 5.04, and then again in May when it dropped another 10 points to 4.94 per cent.
OSFI has said it will consider recalibrating this new 5.25% benchmark rate in a year but it could always be sooner.