Stress Test Rate Change
If you are in the market for a new home, you may have already noticed some changes with your pre approval or mortgage rate when qualifying for a new home. Since June 1, both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage. The process of of approving an uninsured new mortgage against a qualifying interest rate is known as a stress test and is meant to ensure you can still pay your mortgage even if rates rise. In either case borrowers will need to prove they can afford payments based on the higher of the contract rate plus 2% or a new floor rate of 5.25%, up from the current 4.79%. Currently, the qualifying rate is your contract interest rate plus 2% or the benchmark rate which sits currently around 4.79%. With the low mortgage rates already offered in todays market most mortgages are stress tested against a 4.79% interest rate. These changes have increased that qualifying rate about 1/2 a percent.
Why The Changes?
As we have seen double digit % home price increases over the past year there are many in the mortgage industry that feel that the housing market has become over heated. In some neighbourhoods price increases have exceeded +25% while the number have sales has exceeded +40%. There is no doubt that these increases have ben driven by numerous factors not the least of which is ultra low interest rates. But it will remain to be seen if these new stress test rules will have any impact on price increases or number of sales. Lack of inventory has likely continued to be the driving factor with higher home prices and while this new test partially aims to cool home buyers it is most likely to help provide a safety net for new home buyers to ensure they can still afford their monthly mortgage payments in the event rates increase.
New Mortgage Rules 2021
- Homebuyers will need a credit score of 680 which is 80 points higher than the previous requirement of 600. If it is a couple who are purchasing a home than one of the applicants will need a credit score of 680 to qualify.
- The maximum gross debt ratio (GDS) is down to 35% (down 4% from the previous 39%) and the maximum total debt ratio (TDS) is now 42% (down from 42%)
Ultimately you will now need to show that a smaller percentage of your income can be used to pay off your debt.
What Impact Will This Have With Affordability & Home Prices?
The impact remains to be seen but we may see in the coming months if there are any trends to indicate the new rules have made an impact on either affordability or mortgage qualification. Generally, prior to these rules, a family earning $100,000 with a 20% downpayment and a 5 year fixed rate of 1.78% amortized over 30 years would qualify for a $651,000 mortgage. With the new rules the new qualifying amount will be reduced by approximately 5% or $33,000 for the same scenario. This may mostly impact first time buyers or those trying to break into the real estate market in the sub $800,000 price range as that 5% difference will become more significant as the price range increases. What overall impact this may have on the real estate market if any will be seen in the coming months.
Posted by Paul Ambler on