Page 5 - Real Estate Now Sept-Oct 2021

Originally implemented in 2018, the mortgage stress test is designed to prove you can still make your regular
mortgage payments even if interest rates were to rise in the future. When you apply for a mortgage, you are offered
a contracted rate, which lenders must check against the stress test’s higher qualifying rate—currently 5.25%, or the
contracted rate plus two percent, whichever is higher—to ensure you can make payments. The stress test is applicable
to new home buyers, in addition to existing mortgage holders who want to refinance or switch lenders.

Who does this change affect and by how much?

In terms of how much the latest stress test change has impacted purchasing power, Laird said the new qualifying rate
reduces maximum affordability by about 5%. If you’re trying to buy a home or refinance your existing mortgage, this
means you now qualify for 5% less than what you would have when the rate was set at 4.79% prior to June 1st, 2021.

Whenever there is any kind of financial tightening, first-time buyers will be affected the most, said Laird. This is
especially true in high-priced markets like Toronto or Vancouver where the barrier to entry tends to be higher. For
new buyers who were hoping to purchase near the maximum of their borrowing capacity, they may no longer qualify
for the property they wanted to buy prior to the new changes.

“If you had a little bit of wiggle room for what you wanted to do, this 5% reduction [is] probably not going to affect
you,” explained Laird. “The people who thought ‘Okay, I just barely qualify for what I want,’ and now [say] ‘Okay, I just
barely do NOT qualify for what I want,’ it’s those people who have to do something.”

Buyers who now no longer qualify for the home they desire have a few options, Laird said. This includes adjusting
the type of home they want to purchase, or postponing their property purchase until they can save more money or
boost their household income.

In comparison to first-time buyers, existing homeowners will likely have built-up home equity, along with potentially
higher incomes and better credit scores working in their favour, said Laird.

Will this have an effect on the overall housing market?

In addition to amending the stress test’s minimum qualifying rate, OSFI has now implemented a process to review the
rate annually in December ahead of the busy spring market. Laird said elements like the country’s economy, interest
rates, and home prices will factor into their decision to make any future changes to the rate.

Laird also explained the intent of tightening policies is to keep real estate prices in check and to slow price appreciation,

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