It's Your Money  

Mortgage stress rising

Qualifying for a mortgage just got even harder.

Following rate hikes from the big six banks over the past few weeks, the Bank of Canada elected to raise its benchmark mortgage rate as well. 

The BoC’s benchmark rate is one of the key components of the stress test used for mortgage qualification purposes and every time that rate goes up, it decreases the amount of mortgage that someone can qualify for. 

The mortgage stress test came into effect at the beginning of 2018 and is the latest in several rounds of increased qualification standards for Canadian mortgages.

The new stress test makes it harder for many Canadians to qualify for a mortgage and has some serious design flaws.

For example, we heard almost no pushback from the big six banks on this new rule since they still hold most mortgages here in Canada and any one renewing an existing mortgage does not need to qualify with this new test.

That means many people will be forced to stay with their existing lender, even if their renewal rates are not very competitive.

On the flip side, the new rules will help keep people from buying more house and taking on more debt than they can realistically afford.

My column last week talked about the serious debt crisis and housing bubble that exists in Canada right now and these rules will help (although likely not enough) to curb that somewhat.

Homebuyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the BoC benchmark rate, even though their actual contract rate with their lender will likely be lower.

Those with more than 20 per cent down (who don’t require CMHC insurance) will need to qualify at the greater of the BoC benchmark rate or two per cent higher than their contract mortgage rate.

The rate increase by the BoC last week took the benchmark from 5.14 per cent to 5.34 per cent.

This may not sound like a big jump, but it does have a big impact.

Let’s compare a $380,000 condo purchase using five per cent down and a 25-year amortization schedule mortgage.

The minimum income required to qualify for the above mortgage would have been $83,999 before this stress test came into effect.

Now, the same homebuyer would need $100,255 of income (assuming no other debts) to qualify. 

The homebuyer with $85,000 of annual income would need to either find a lower priced condo or wait until they save up a larger down payment. 

At current benchmark rates, that same person with $85,000 of income would need to save up a full 20 per cent down payment, or $76,000 instead of $19,000, in order to qualify.    

In some ways, the new stress test and the latest BoC benchmark increase is a good thing as it helps curb Canadian’s unquenchable appetite for debt. But many hard-working Canadians struggling to buy their first home will certainly disagree.

Either way, it is very important to know all the facts before buying your first home or renewing a mortgage

And make sure to not take on more debt than you can reasonably handle. 

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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