Mortgage stress test new challenge facing new homebuyers

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From June 1, 2021,  homebuyers are facing tougher mortgage stress test rules in Canada, which could make it more difficult for some people to get onto the property ladder.

This follows an update to Canada’s mortgage rules announced by the banking regulator in May, in response to an overheated housing market.

Canada had raised the level of the “stress test” for mortgages on Tuesday, setting the new level at 5.25 percent — or two full percentage points above the borrower’s mortgage rate, whichever is higher. That’s an increase of about half a percentage point from where it was before.

Launched in 2017 to cool down the overheated market of the time, the stress test is a minimum threshold that anyone applying for a home loan in Canada has to meet. It doesn’t make the loan itself any more expensive. Rather, it ensures anyone getting a mortgage will be able to pay it off if rates go up.

According to lowestrates.ca, the current lowest five-year fixed mortgage is 1.69 percent as of Tuesday afternoon. The average price of a home in Canada is $716,828 as of April 2021, according to the Canadian Real Estate Association.

While interest rates are currently at record lows as a result of the pandemic, they’re not guaranteed to stay that way over the long term. In addition to cooling demand, the feds hope that this additional stress test will protect buyers who may struggle to make their mortgage payments if interest rates increase in the future.

Prior to the update on June 1, Canadians applying for an uninsured mortgage had to pass a stress test, proving that they would be able to continue to pay their mortgage if interest rates were to hit 4.79%.

This value has now been raised and prospective borrowers must prove that they can keep paying if interest rates hit 5.25% (or 2% above their contract rate, whichever is higher).

This even applies to prospective buyers with a down payment of 20%.

The average price of a Canadian home sold in March went for $716,828, a figure that rose by more than 30 percent in a year. That was the biggest annual increase on record.

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