Is the mortgage stress test hurting young buyers?

As little kids, we used to adventure and run through forests and greenery. We would stumble upon creeks and rivers. To get across we used to jump or step from stone to stone until we crossed the water. Without these little stepping stones, it would’ve been harder for us to cross the water and take longer. With the mortgage stress test, the home buying process has gotten a little bit harder for home buyers. Going from renting a property to buying has gotten a little harder and can take a little longer. Luckily, with the help of some stepping stones, the thought of buying a house is not impossible.

Testing a borrower’s purchasing power

The goal of the stress test was to ensure that uninsured borrowers, or those with over 20 per cent down payment, would be able to afford their mortgage with an increased interest rate. The borrower would be tested against the interest rate being higher by two percentage points and the five-year benchmark rate from the Bank of Canada-whichever is higher. For example, if the fixed rate for a mortgage was 2.69 per cent the borrower would be tested at 5.19 per cent (as of today’s date). With this, the borrower’s purchasing power is lower, and they may not be able to afford as much house.

A buyer’s affordability

Let’s envision we were originally looking to get a mortgage that was $300,000. With the stress test, we would only qualify and be able to afford a mortgage of $240,000. You may find that you cannot afford as much house as you originally thought. Moreover, home owners that are looking to sell and move into a house of similar value or more may be faced with the fact that they no longer qualify for as much house.

Borrowers being more strategic

When working to enter the housing market, home owners are becoming more strategic. There are more thought and preparation going into purchasing a home and going from being a renter to being a home owner. When talking to a mortgage broker, potential buyers will discuss if it’s more beneficial to continue renting and save or start small to work their way up. They may find that they need to move into a condo or smaller house first and then work up to purchasing their dream home from there.

Impact of the stress test

Overall, the stress test is making home owners more aware of their purchasing power. They are becoming more strategic with how they get from point A to point B. The stress test may now mean a borrower simply takes the journey to homeownership a little slower. This may involve purchasing a condo first or moving into a home that has smaller square footage. When you’re strategizing the journey into homeownership, come talk to one of our mortgage professionals at Clinton Wilkins Mortgage Team. You can get in touch with us here.