With inflation comes higher interest rates, and with higher interest rates your purchasing power decreases. So when looking to purchase at your maximum purchase price, a rate hold in place can make a huge impact!
June of 2021- Significant changes to Stress Test Creating Huge Implications Today
In June of 2021, The Bank of Canada changed the stress test for insured mortgages (less than 20% down) to match the requirements for stress testing conventional mortgage’s (minimum 20% down). The Bank wanted to ensure that if interest rates rose, Canadians could afford it. The “stress test’ rate is an interest rate calculation which is higher than your contract rate, and used to calculate the debt ratio’s used in mortgage qualifying.
The stress test is calculated as the GREATER of
– the Benchmark rate; currently 5.25%
– or the *contract rate + 2%.
*contract rate = the actual interest rate applied to your mortgage as per your mortgage contract.
When these changes took place in 2021, the Benchmark rate was most often higher than contract rate plus 2%. Today however, with 2022’s rate increases and Septembers increase to 5.45% with most lenders PRIME Rate for variable mortgages, the rule change is now making a significant impact on qualifying, as all mortgages are now being stress tested at 2% above contract rate, even on variable rate mortgages.
Lets look at the example below to demonstrate how your maximum mortgage amount would decrease with interest rate increases.
Household income= $100,000
5.25% Benchmark stress test rate = $450,000 mortgage amount
6.79% Stress Test rate: contract rate of 4.79% plus 2%=$410,000 mortgage amount
7.25% Stress Test: contract rate of 5.25% plus 2% = $390,000 mortgage amount.
Even more significant is how quickly a mortgagee’s purchasing power is reducing with increases to interest rates.
As we are in a highly volatile interest increasing environment, it is essential to receive a pre-approval with a rate hold as this way you can be sure that your dream purchase price is still obtainable within the rate hold period, when you find your home.
Do NOT delay, call a Mortgage Sister today!