The Mortgage qualifying goal posts have slightly moved, again!
Here’s a quick history of recent rule changes:
July 2020: CMHC qualifying rule change (in effect).
April 2021: Uninsured qualifying rule change (effective 1 June 2021).
*May 2021: Insured qualifying rule change (effective 1 June 2021).
*denotes new change announced.
The Newest Mortgage Qualifying Rule Change Explained:
Part One: Preffice.
When qualifying for a Mortgage all applicants are subject to a stress test. This means the applicants affordability is calculated based on a higher interest rate than current market interest rates.
The stress test lowers home buyer affordability. Mortgage stress test qualifying, for all Mortgage applicants, have been around for years now.
Insured Mortgages apply to applications with less than 20% down payment. These Mortgages include Mortgage default insurance (CMHC for example).
Uninsurable and insurable Mortgages apply to applications with 20% down, or more. For now, let’s not get bogged down in this distinction.
Part Two: Update.
Yesterday, “they” announced the insured Mortgage qualifying stress test interest rate would increase to a minimum of 5.25%. The current insured stress test interest rate is 4.79%.
“They” are citing this as a pre-pandemic stress test rate, which is fair. “They” are also concerned about housing affordability, Mortgage loan uptake growth, and the prospect of higher interest rates. Fair enough.
Part Three: Effect.
Increasing the qualifying interest rate, decreases maximum home affordability. In this case, maximum home affordability decreases by about 4.5%.
If my maximum purchase affordability was $450,000 that is now decreasing to $429,750 (effective 1 June 2021, all else being equal).
The “do not panic” Conclusion:
We’ve all heard about concerns about Canadian home values, the amount of Mortgage growth (leverage), artificially low interest rates, inflationary pressures and potential normalization of rates (…and more).
This macro-prudential Mortgage rule change is intended to gently push back on Canada’s housing market. I think other Mortgage rule changes could be dreamt up in the future to continue to ease this segment of Canada’s economy.
Why? Because this is like using a scalpel instead of a sledgehammer. These rule changes apply only to housing. A interest rate hike, which would accomplish the same result on Canada’s housing market, would have a much more lasting and broad effect on the whole Canadian economy.
I’m use to Mortgage rule change announcements giving us weeks, if not months, of lead time for new rules to take effect. Not the case here. This latest rule change takes effect 6 business days from announcement. That’s fast.
Was this premeditated? Or is this a knee jerk reaction? I don’t know. The decision is made and we move forward regardless.
Do you have a question? Leave that in a comment below. Please pass this article along to other interested people.
Talk soon,
Chad Moore
