Stock photo licensed from iStockphoto.com
Cooling the Market?
Will tighter mortgage rules cool the market? We’re about to find out.
The Office of the Superintendent of Financial Institutions (OSFI, an agency of the federal government) has announced plans to change the mortgage “stress test” as of June 1st by raising the qualifying rate.
What does this mean, and how will it affect the housing market?
When you apply for a mortgage, you must pass the “stress test”. This is a calculation that checks whether you’ll still be able to pay your mortgage if interest rates go up. If you would still be able to pay at the higher rate, you pass the stress test.
Right now, the test is set at your mortgage rate plus 2%, or the Bank of Canada 5-year benchmark (currently 4.79%), whichever is higher. The OSFI plans to replace the Bank of Canada benchmark with a fixed minimum of 5.25%. So, the stress test will be getting a little more strict on June 1st.
In theory, making it harder to qualify for a mortgage would reduce the total number of buyers (or lower their preferred price range), which reduces the upward pressure on prices.
However, many mortgage brokers believe these upcoming changes to the stress test won’t have a major effect on the market. First of all, the changes only affect the stress test for buyers who have more than 20% down payment, which excludes most first-time buyers (about a third of the market).
Secondly, the OSFI estimates that the overall effect will be to lower the available mortgage amounts for affected buyers by 2-4%. In a time when prices are increasing 2-6% every month, this is barely a blip.
In fact, the proposal might actually heat up the market in the short term. Knowing the change is coming, some buyers may rush to make a deal before June 1st. (This has happened before when mortgage rules were tightened.)
So, will these changes cool the market? It seems unlikely. The real barrier to buying will continue to be affordability, not the stress test.
Want to know more about mortgages and qualifying? Just ask me, I'll be happy to help.