One of the biggest differences in qualifying for a mortgage today vs. three years ago was the introduction of the stress test on all mortgages. This basically means that you must qualify as if your rate was higher than the rate your payments are based on. More specifically, you must qualify based on the higher of the benchmark rate set by the Bank of Canada (currently 5.34%), or 2% above the contract (the rate your payments are based on). As mortgage rates have increased approximately 1% since the introduction of the stress test, qualification becomes even more difficult, particularly for first-time homebuyers.
As of today, 5 year fixed rates range from 3.34% – 3.59%, depending on purchase price/property value, etc.
Three years ago, 5 year fixed rates at 2.49% were common. No stress test was required providing that you chose a 5 year fixed rate (shorter term and variable rate mortgages have had to pass a stress test since 2010).
Let’s now take a look at how much one would qualify for today, vs. three years ago. Let’s say John and Mary have a $120,000 annual household income, 20% down payment, and are looking for a 30-year amortization.
In 2016, they would have qualified for a mortgage of $780,000, which would have meant a purchase price of $975,000 once you factor in their 20% down payment.
Now fast forward to early 2019. The lowest 5 year fixed with a 30-year amortization is 3.59%, however, the qualifying rate would be 5.59%. This means that John and Mary will have to qualify as if their payments were based on 5.59%, regardless of their actual payment. The exact same $120,000 income will now qualify them for a mortgage of only $560,000. That’s $220,000 LESS than they would have qualified for 3 years ago. To add fuel to the fire, the average sale price for a home in the GTA was $729,837 in 2016 vs. $787,300 in 2018 according to the Toronto Real Estate Board.
With the combination of higher mortgage rates and a cooler housing market, the future of the stress test is uncertain and may eventually be abolished. I wouldn’t, however, hold your breath on this. Despite the fact that mortgage rates have risen, they are still quite low by historical standards.
One advantage to the stress test is it helps protect people from rising rates. Not from the rates themselves, but from an affordability standpoint. In other words, if their qualification was based on a much higher rate, then they should still be able to afford their mortgage payments should rates increase further. From that perspective, the stress test was actually a pretty good idea. It could help avoid an economic disaster should rates rise to the point where many would not be able to keep up with their mortgage payments.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.