We frequently get repeat inquiries from clients we’d spoken to in the past. For various reasons, they weren’t ready to make their purchases or refinance at the time but were working towards setting themselves up to do so (i.e., down payment, credit, etc.). Now that they are ready to move forward, they find themselves not being able to qualify for the same mortgage they would have a year prior (or sometimes, only months later). What gives!?
The short answer is that interest rates have nearly tripled from their all-time lows in 2020-2022, and the published qualifying rate is no longer used in the stress test. As a reminder, the stress test that needs to be used in qualifying for a mortgage is either the published “qualifying rate” (which is currently 5.25%) or the contract rate + 200 bps (basis points), whichever is higher. By default, all mortgages are now being qualified at the posted rate +200 bps as this exceeds the qualifying rate in all cases. (At the time of writing – August 2023).
From 2020 – early 2022, the “contract rate” + 200 bps was less than the qualifying rate. Therefore, in most cases, the qualifying rate was used across the board to determine maximum mortgage affordability. This means that the stress test has ultimately gone up, which unquestionably puts downward pressure on one’s mortgage affordability.
For example, if you have an income of 100k and used the qualifying rate of 5.25%, you could manage a maximum mortgage of approximately $480,000. However, using a contract rate of 5.34% + 2% (or 200 bps), then the maximum mortgage affordability gets reduced to approximately $420,000. This is just a rough calculation for illustration purposes.
In short, the main reason for this shift in the stress test approach is that the contract rate has risen to exceed the qualifying rate. Fortunately, home prices have recently come down from their all-time highs and in some cases, are enough to offset any decrease in mortgage affordability. But the Canadian housing market remains competitive and although home appreciation has decelerated, housing remains unaffordable for many in 2023.
Conclusion: There is no one in Canada, who hasn’t seen a decrease in their mortgage affordability, as the rules apply to everyone! Although this is the current state of qualifying for a mortgage, there are often strategies we can use to help nudge (increase) mortgage affordability in a favorable direction. If you would like to learn more about this topic or would like to assess your affordability, please give us a call today at (905) 455-5005.