OTTAWA – A new mortgage stress test rate of 5.25% comes into effect in Canada on June 1.
The federal government is raising the rate by 4.79% in an attempt to calm the currently raging housing market.
“We need to make sure that you can pay off a house using a higher interest rate than you actually will,” says Kyle Miller, mortgage agent at Mortgage Brokers Ottawa. Miller says the higher stress test rate will reduce the purchasing power of bidders who bid significantly over the asking price.
“They’re looking to cool the market, and forcing people to qualify at a higher rate, it’s going to limit how far their money goes, which is going to limit how much they can actually bid on a house,” Miller says.
For the average home buyer in Ottawa, that means a lot less money will be available for pre-approvals. In April, the average price for homes in Ottawa was $ 758,800. On May 31, a family with a family income of $ 145,000 could be approved for that average home price with the minimum down payment. But as of June 1, that same family with a minimum down payment would only be approved for $ 720,900 due to the higher stress test rate. That’s $ 37,900 less than the family would be allowed to spend on a house.
“This is definitely bad news for people with the highest budgets,” Miller says, and it’s where buyers seem to be spending.
“My experience with buyers is that people always buy until the end of their pre-approval,” says Paul Lavictoire, sales representative at Keller Williams VIP Realty in Arnprior. “So if you’re pre-approved for $ 600,000, people buy $ 600,000.”
Lavictoire says this means buyers will have to consider their budgets and expectations.
“So if your pre-approval gets canceled and you think about buying a $ 600,000 house, you might be considering a $ 550,000 house now,” says the Valley realtor.
So what does this mean for the future of house prices, which still seem to be on the rise?
“A more difficult stress test will certainly slow the market to some extent,” says Robert McLister, mortgage writer at RATESDOTCA.
McLister says the long-term effects of the higher stress test rate are too difficult to predict, but the short-term effects will be visible immediately.
“You’re going to see people asking for more money from mom and dad, finding a co-borrower, buying a smaller house, a less desirable house, a house further from town, longer commutes, or a house that has need work. “