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In response to concerns that significant increases in housing prices could lead to a rise in defaults in the future should low interest rates start to climb, the federal government introduced mortgage stress test measures on Oct. 17.

To past this test, a homebuyer must still be able to afford to make payments in the event that mortgage rates rise to the Bank of Canada’s posted five-year fixed rate. This rate is usually higher than what a buyer can negotiate with banks or other lenders.
In addition, the stress test also sets a ceiling of no more than 39 per cent of household income being necessary to cover a home’s carrying costs, such as mortgage payments, utilities and taxes.

Affect on Homebuyers
Experts have noted that this change could greatly limit first-time homebuyers, if not exclude them completely, from qualifying to purchase a home. The homebuyer would need to qualify for a loan at the negotiated rate in the mortgage contract and then also at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada. This rate is usually higher than what buyers can negotiate. As of Sept. 28, the posted rate was 4.64 per cent.

Before October 17 
Before October 17 , a stress test was applied to homebuyers seeking an insured mortgage with less than 20 per cent as a down payment. Individuals with a down payment of 20 per cent or more who were seeking an insured mortgage from a private insurer were not subject to the stress test.

More Rules to Come

Starting Nov. 30, the government will implement new restrictions regarding when it will provide insurance for low-ratio mortgages. A mortgage where the down payment is equal to 20 per cent or more of the property’s value/purchase price will only qualify for insurance if all the following criteria are met:
1) The amortization period is 25 years or less;
2) The purchase price is less than $1 million;
3) The property be owner-occupied;
4) The buyer has a credit score of 600 or higher.

Immediate Ramifications
Canadian real estate brokers have already reported that as a result of the new rules, mortgages typically approved in the past are now being denied. This particularly puts a strain on the Montreal real estate market, where homebuyers were just beginning to see signs of affordable housing on the rise in September. However, with these new rules, the definition of “affordable housing” has been somewhat redefined – especially for first-time homebuyers.

Long-Term Benefits
Ultimately, the federal government sees these new measures as necessary for Canada to prevent a future housing market crash.
The central bank has indicated the new rules should cool resale activity in the housing market and push developers to focus on building smaller units.
According Stephen Poloz, Governor of the Bank of Canada, the housing measures will lead to “higher quality” borrowing patterns over the longer-term.