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Jason Balewski

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New mortgage stress test rules take effect June 1 2021

Mortgage Winners  An update from my mortgage brokers at Mortgage Winners

New mortgage stress test rules take effect. Here’s what you need to know!

Starting June 1, Canadian homebuyers will face tougher mortgage stress test rules that will decrease the buying power of most borrowers.

The move, announced by the country’s banking regulator in May, was in response to an overheated market that has already started to see signs of cooling.

The pace of home sales seen at the start of the year started to slow in April as the number of homes sold fell by 12.5 per cent compared with the record high set in March, according the Canadian Real Estate Association (CREA).

Even prices in the country’s largest market have started to stall. The average selling price for the Greater Toronto Area was $1,090,992 in April, down slightly from $1,097,655 the previous month, according to the Toronto Regional Real Estate Board.

Who do the new rules impact?

The new mortgage stress tests will affect Canadian homebuyers applying for or renewing a mortgage.

The new qualifying rate on uninsured mortgages – where the down payment is more 20 per cent or more – is now either two percentage points above the contract rate, or 5.25 per cent, whichever is higher.

Before June 1, any buyer whose down payment was 20 per cent of the purchase price or more had to show they could afford mortgage payments if the interest rate was two percentage points higher than what the bank is offering them or 4.79 per cent, whichever was higher.

After the Office of the Superintendent of Financial Institutions (OSFI) announced the changes earlier this month, Finance Minister Chrystia Freeland said the federal government would align with the regulator by establishing the same qualifying rate for insured mortgages – where there’s a down payment of 20 per cent or less – for mortgages approved on June 1 or later.

“Insured borrowers are about a quarter of the market,” said Rob McLister, mortgage editor of rate comparison websiterates.ca. “And so these folks are generally earlier in their careers. They have less financial resources … so when you reduce their buying power, it has a disproportionate impact.”

How much will they affect my buying power?

The move to implement tougher stress tests will reduce borrowers’ theoretical buying power by a little over four per cent, according to McLister.

“In practice, it’s generally only the people that have high debt-to-income ratios to begin with that are going to be impacted by this,” he said. “And that could be roughly one out of 10 uninsured borrowers, if you use OSFI’s data, and roughly one out of five insured borrowers.”

As an example, a family with an annual income of $100,000 with a 20 per cent down payment and five-year fixed mortgage rate of 1.78 per cent amortized over 30 years would qualify for a home valued at $651,000 under the previous 4.79 per cent qualifying rate, according to ratehub.ca.

Under the new stress test rate of 5.25 per cent, that family’s maximum affordability would decrease to $618,000.

Will the new rules help lower home prices?

The new mortgage stress tests alone likely won’t put a huge dent in home prices, experts say.

As always, Mortgage Winners is committed to being there for you, so you can be your best for your clients. 

If you are considering a mortgage in the coming months, let's connect to discuss the impact of this change on your plans.  Please give me a call to discuss your options.

Warm regards,
Gagan Gahunia

Mortgage Winners   
Gagan Gahunia
Principal Broker - Planning and Strategy
Mortgage Winners
FSRA Brokerage Lic. #12421
O: 289-878-2042
M: 647-898-1448
10 Bronte Street South, Suite 403, Milton, ON L9T 9M2