The government pendulum has started to swing a little bit back after the extreme measures it took back in 2017 when it slashed the purchasing power of home purchasers by 20%. The stress test has affected almost all mortgage holders including seniors, home purchasers and people renewing their mortgage. Adding 3% back, limited to mortgages with less than 20% down payment, is too little. Let’s see how it works out in several examples below.
The new rule will take an average of the top banks 5 year discounted fixed-rate and add 2%. Currently,the Bank of Canada is using the posted 5-year Conventional Mortgage rate offered by the big six banks. This artificially inflated rate is not truly representative of average contract rates offered by banks, credit unions and mortgage finance companies.
The Big Six Banks tend to keep their posted rates very high to ensure that when a client is breaking their mortgage the interest rate differential penalty will make the cost to break the mortgage prohibitive. It also keeps people stuck at their current mortgage lender because they are now unable to qualify with the artificially high rate that is currently in place. The “posted” rate has very little to do with the actual mortgage rate a consumer is going to receive.
What impact will the new qualifying rate have?
This new qualifying rate is only for mortgages with less than 20% down. Mortgages with more than 20% down currently still must qualify at the higher rate. As if the mortgage industry is not confusing enough, once again, people with larger down payments get the short end of the stick. This policy may change and there are “discussions” around the qualifying rate for a client with more than 20% down payment.
Let’s assume you have 5% down and want to buy a house.
Currently, you would have to qualify at 5.19%. As of April 6, when this gets implemented, you would qualify at 4.89%. Mathematically you will get about 3% additional in purchasing power. Not a game-changer by any means but every little bit helps.
What does this mean for your income level?
*For the above qualification I used a 25-year amortization, property taxes of $3570 – $570 Homeowner Grant = $3000, Heating of $75 per month and GDS of 39% and a 4% high ratio insurance premium. Everyone will be a little bit different. For the lower-priced properties, the taxes I used will be high, but there will be condo fees to compensate so the numbers, although not perfect, will give you an idea.
When I lived in Vancouver, I had a really hard time accepting the price of Real Estate. Bill Macklem, a mortgage broker I have known for years, gave me some great advice.
He said, “if you can afford the mortgage payment, and the interest on the mortgage is less than your rent, you are further ahead with buying.”
I came home, gave our landlord notice and cashed out some RRSPs to buy a condo. In the future, I would not put in my notice before actually finding a place to buy. We were almost homeless for a bit.
With rates as low at 1.99% for a 3-year term with HSBC, if you make $60,000, at 5% down you technically should be able to qualify for a $419,889 mortgage and a $440,883 purchase price. That is $156,192 difference. That is why so many people are bringing on co-signors.
If you are comfortable with the mortgage payment amount, figure it out. Consider bringing on a co-signor, selling anything you don’t “need.” Get rid of subscriptions, sell your second car, buy a house with a suite. Whatever it takes. It is worth it. Home is Worth the Effort.