The bottom line is this, despite the new mortgage stress testing, which took effect on January 1st this year, you can still buy a home!
What’s this stress test?
Stress testing is a best practice risk management tool. Stress tests are used by financial institutions to gauge how their business would fare under extremely difficult conditions. Basically if the Bank of Canada raised the interest rates by say 2% over a short period of time, how would this affect people’s ability to pay off their mortgages? Can they still pay it? or will they default, causing a economic crisis?
Who is dictating this?
The Office of the Superintendent of Financial Institutions Canada (OSFI) is an independent agency of the Government of Canada, established in 1987 to protect depositors, policyholders, financial institution creditors and pension plan members, while allowing financial institutions to compete and take reasonable risks.
On October 17, 2017 OSFI released new guidelines for the mortgage industry in Canada. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.
Why is this happening?
Of course this make it harder to be qualified for a larger mortgage (debt), but for good and logical reasons. According to Statistics Canada, household credit market debt as a proportion of household disposable income is 170.4. This means there is a $1.70 in credit market debt for every dollar of household disposable income. So with the Canadians debt to income ratio being historically high, especially in Greater Vancouver Area and Greater Toronto Area, any fluctuations in bank interest rates will shoot up the mortgages and many mortgage owners may not be able to keep their homes. Kind of what happened in 2008 in the US – an economic disaster. So to avoid this, when a bank tries to qualify you for a mortgage, they will offer you a mortgage rate but add 2% to that. Of course this makes your home purchase power less, but it makes your more robust to interest hikes.
So now what?
You can still buy a home. You just have to change your game plan. For one you need to get your finances in order. This means work and save your money, watch your spending. You simply need to make some lifestyle changes to allow you to save more. Don’t buy too much on credit, aka money you don’t have. Do you really need that latest phone or car? Do you really need 10 pairs of jeans? Do you need multiple expensive vacations? In a perfect world, everyone wants everything. But you have to ask yourself, what is more important to you? If having a home is the answer than that is your goal and reason to sacrifice other things to be able to save a larger down payment.
Second, you may not be able to get the newest, biggest, nicest house in the best area in the city. You may have to consider condos and townhouses, instead of fully detached home which tend to run higher in price. You may have to expand your search, which mean checking out suburbs. Sure that extra 10-15 minutes drive from work when you’re already so tired is a major pain but you can get more land and bigger house. So in the end it’s about sacrifice and what’s more important to you.
Lastly, no mater if you’re buying a home or selling a home, you definitely should hire a real estate agent. A trusted professional that will be able to guide your thought the whole process. Buying or selling a home is a serious thing and trying to do it all yourself is highly not recommended. If you’re in the Burlington real estate market, be sure to contact Team VanDinther – Lori and Kim. They provide exceptional service with integrity, experience, knowledge and skilled negotiating.