In October 2016 the federal government introduced a stress test which required borrowers to qualify for a rate higher than what they were actually paying. This was implimented to protect borrowers in the event that interest rates increased in the future so that they would still be able to afford the higher mortgage payments. Under the previous rules a borrower would need to qualify for 4.79 per cent. Starting June 1, 2021 the stress test requirement for uninsured mortgages has increased to 5.25 per cent.
What Caused The Increase Of The Stress Test?
An increase of buyers and lack of inventory has caused the price of homes to skyrocket in the last year, causing many buyers to overextend their budget and stretch their mortgage budgets to the max. This is almost never advisable, however in a market where we are seeing multiple offers on properties and homes selling for over list price it is hard for a purchaser to not want to extend their budget, especially when they found their dream home.
In an effort to help cool the market, the federal government has updated the mortgage stress test for uninsured mortgages (anyone paying less than 20% down) and increased the qualifying rate to 5.25 per cent. That means, if you qualified for $500,000 under the previous minimum qualifying rate of 4.79 per cent, that amount is reduced to $479,000 under the new qualifying rate. This does not mean you will be paying 5.25 per cent but you do have to qualify for it in order to be approved for a mortgage.
Who Will The Stress Test Affect Most?
In my opinion this stress test will mostly affect entry level borrowers and new home buyers trying to buy their first home, as a lot of the activity in the Okanagan is coming from sellers in other markets such as Vancouver and provinces like Ontario where they sold their home for a substantial amount over what they paid and came to Kelowna with cash offers or a substantial down payment. This will, however, protect the most vulnerable sector of the market in the event that they overextend their budget and then see interest rates increase to a point where they would need to sell their home in order to afford the cost of living.
The average price of a single family home in Kelowna has increased 10% so far in 2021 and has increased 40% over the last 12 months.