How New Mortgage Rules Are Affecting Home Buyers

It has been nearly a full year since the federal government implemented a new financial stress test which prospective home buyers must pass in order to qualify for a mortgage from federally regulated institutions. The stress test is a calculation to see how a homebuyer would manage if interest rates on their mortgage were to go up. The initiative was meant to protect Canadians from buying more home than they could afford and to protect lenders against default. Many real estate professionals have opposed the stress test, arguing that less than 25 in 10,000 Canadians are behind on their mortgages.

But what has been the real effect of the stress test on buyers? 

For starters, it means that some buyers are not qualifying for mortgages from the big banks at all while others are having to settle for a less expensive home than they would like. This is predictably having a cooling effect in real estate markets across the country with the exceptions of Montreal and Ottawa. Currently, the average price of a home in Canada is $491,000 – that is a 10% decline since last March.

Of course, this average is skewed considerably by the country’s priciest markets – Toronto and Vancouver. If you remove those from the mix, then the average housing cost is only down about 2%. In Toronto and Vancouver, the result of the financial test is that is has been pushing more buyers into less expensive homes such as condos and townhomes. The result is that the price of these types of homes have risen considerably in those cities – 26% and 12% respectively in Vancouver and Toronto.

The stress test has been particularly hard on younger buyers as well as newcomers to Canada, and as a result many in that demographic have been pushed out the market.

So what can would be homeowners do in light of the new mortgage rules? Essentially, they have three choices. 

  1. Delay buying a home – some Canadians are pushing homeownership further out into the future until they are able to afford the home they like. This can be a good strategy particularly if they are paying down their debt and advancing in their careers as these things will help them to eventually pass the financial stress test. The tricky part is that rising housing prices or increases to the interest rate by the Bank of Canada could derail such a plan. 
  2. Settle for a less expensive home – this strategy can get Canadians into a home more quickly, but it is important for them to choose a home that they can still be happy with long term.
  3. Seek out non-federally regulated lenders – The financial stress test only applies to federally regulated lenders – in other words it only applies to the major banks. Credit unions and alternative lenders are provincially regulated and therefore are not required by law to impose the financial stress test. This can be a good strategy for Canadians who want to get into the home of their choice at the time of their choice provided they manage their money wisely. 

If you would like help determining whether you would be able to pass the financial stress test, or if you would like to learn more about working with provincially regulated lenders, then contact CYR Funding for a free consultation.

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