Should you stress about the new mortgage stress test rate?

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You may have seen some discussion in the media lately about rising mortgage rates. And if you’re wondering what the means for you, you’re not alone.

With the bump in five year fixed mortgage rates from all of the major financial institutions in early May, the Bank of Canada raised the benchmark qualifying mortgage rate from 5.14 percent to 5.34 percent. This is the interest rate used for mortgage stress testing—the qualifying rate used to decide if you can afford a mortgage.

This rate is set for the entire country, not each individual market. The good news? Because housing prices tend to be a little lower in Atlantic Canada than in the rest of the country, the new changes probably won’t impact us as much as somebody in Toronto or Vancouver.

Background

The first step in buying a home is qualifying for a mortgage. That’s where the qualifying rate comes in. The qualifying rate isn’t the actual interest rate you’ll pay on your mortgage, but it’s used as an affordability “stress test” for borrowers wanting to qualify for a mortgage. With the stress test bar set higher, for many homebuyers it means you may need to have a higher income to qualify for a mortgage than you would have in the past.

What is stress testing?

Ultimately, stress testing is all about protecting you—the homebuyer—by making sure you’re buying a place you can comfortably afford. The goal is to make sure that even if interest rates rise, you’re still able to afford your monthly payments.

Mortgages where buyers have a down payment of less than 20% have been subject to stress testing since October of 2016. In January of 2018, this expanded to all mortgages for banks, while credit unions—which adhere to slightly different rules—remained with the original stress test.

Though it’s not the actual interest rate you’ll pay, the qualifying rate is used to determine mortgage affordability. This means that sometimes—especially in markets where homes are more expensive—borrowers now need to have higher incomes and lower overall debt to afford the mortgage they want. For many people, that means they may need to shift expectations and buy less home or a home in a different area.

How does the qualifying rate change impact Atlantic Canada?

With the qualifying rate increasing to 5.34 percent, markets where homes are more expensive will feel the impact the most. That’s good news for us in Atlantic Canada, because the average price of a home tends to be lower than in other markets.

Here’s the math (based on a 5 percent down payment).

Overall—as you can see from the numbers—the changes won’t have much of an impact here in Atlantic Canada.

Still have questions about these changes or anything else mortgage-related? Get in touch with your local credit union today.