Starting Monday, Canadians face new federal rules that will make it tougher to buy a house.
Potential homeowners hoping to qualify for an insured mortgage will be subjected to a “stress test,” which will check to see whether they will qualify at the Bank of Canada’s conventional five-year fixed posted rate.
The test is meant to ensure the borrower can still service their loan if interest rates rise or their personal financial situation changes.
Before the new rules came into effect, stress tests were not required for fixed-rate mortgages longer than five years.
The new rules are part of the federal government’s efforts to stabilize Canada’s housing markets, especially in cities like Toronto and Vancouver where prices have skyrocketed.
Canadian mortgage brokers admit there was a marked increase in borrowing last week, as home-buyers tried to beat the deadline. Some brokers estimate the surge was as high as 40 per cent.
Earlier this month, Canada’s Finance Minister Bill Morneau announced that buyers with a down-payment of less than 20 percent will need to qualify for the Bank of Canada’s five-year fixed rate of 4.64 percent.
“For all mortgages, you’ve now got to qualify at a significantly higher rate. That means the same income can afford a smaller mortgage,” said Sauder School professor Tom Davidoff.
For example, a buyer with 10 percent down and currently qualifies for a $527,000 mortgage will only qualify for $420,000 under the new rules; a roughly 20 percent drop in purchasing power.
“This is going to impact peoples’ ability to bid so high because a lot of people are going to face limits on what they can borrow,” said Davidoff.