June 12, 2019
Sure, you can afford your home now, but what if mortgage rates go up?
Low interest rates and mortgages have been a fact of life in Canada for some time now. At the time of publication, the 5-year average mortgage rate has hovered around 5% for nearly a decade. This is a far cry from late 1981 when mortgage rates were as much as 21%.
New mortgage rules
In 2017, the Office of the Superintendent of Financial Institutions (OSFI) took steps to help protect lenders and home buyers alike against future interest rate increases. Since January 1, 2018, new mortgages are subject to comparison with higher interest rates than the one issued at the time of the mortgage. Homeowners must be able to afford a mortgage at the Bank of Canada's current five-year average posted rate or at an interest rate that's 2% above what they're currently applying for, whichever rate is highest.
Why OFSI made the move
Perhaps motivated by the foreclosure crisis in the United States, the OSFI felt Canadian consumers needed protection from forces deemed outside of homeowners' control.
The effect of the stress test means you may not qualify for the home you desire. If you're targeting a home with a $700,000 mortgage, for example, you may only qualify for about $550,000 under the new stress test rules. This could make a big difference in your choice of neighbourhoods in certain markets.
Working the stress test process
The new mortgage rules don't have to be a barrier, however. First, there are ways around the stress test standard, which only applies to federally–regulated lenders. Credit unions, which are regulated at the provincial level, are exempt from stress test provisions. The same is true for private lenders. Alternatively, adding a co-signer to your mortgage can increase your mortgage target, even with the stress test rule in place.
How REALTORS® help
There's always lots to consider, particularly if you're a first-time home buyer. In addition to helping you find your dream home, your REALTOR® can also help you navigate the new stress test rules and requirements.
Start by downloading a copy of the Homebuyers' Road Map—a guide covering virtually every aspect related to buying a home. Then, to get an idea of what you might be able to afford, our mortgage calculators includes interest rate risk in its parameters, assuring your estimates will pass the mortgage stress test.
Armed with a little know-how and backed by the support and expertise of your REALTOR®, you'll be on your way to holding the keys to your new home in no time!