As an experienced Realtor, I continue to advise both my Buyers and Sellers of the changes that might affect their purchasing power or perhaps the amount that they might receive in an offer when selling.
As most people know, the recent increase in prices here in the Ottawa market is primarily due to the low mortgage rates.
Homebuyers will face slightly stricter mortgage “stress test rules” starting June 1. This will reduce buying power of purchases to between 4% and 5%, experts say.
If you have been pre-approved for a mortgage under the current test but are still searching for a property, the best advice is to consult your lender or mortgage broker about how the new test will affect you and your home-buying budget.
As we prepared this column on May 27, mortgage brokers are still waiting at bay to be clear on the final decisions on the stress test from their major lenders.
The new rules were introduced to protect lenders and ensure homebuyers can keep up with payments if our current low interest rates start to increase.
Canada’s Office of the Superintendent of Financial Institutions (OSFI), which regulates banks, announced the change recently, following concerns expressed by the Bank of Canada about Canada’s hot housing market and rapidly rising prices, combined with the uncertainty of the pandemic’s impact on the economy and jobs.
“The current Canadian housing market conditions have the potential to put lenders at increased financial risk…The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances, such as the reduction of income or a rise in mortgage interest rates,” the agency said in a statement in April.
In Ottawa and many other Canadian cities, inventory has been much lower than usual for many months. With multiple buyers competing for limited supply, many properties have been selling for over the asking price, leading to larger than usual yearly increases in average sale prices.
The average sale price of a residential-class property in Ottawa in the first four months of 2021 was $734,682, up 35% from the same period in 2020, the Ottawa Real Estate Board reported.
The average sale price of a condominium unit in that period was $418,792, up 20% from 2020. Those increases are well above average for our area, but Ottawa is far from alone in that trend.
The new rules were designed to try to ensure buyers across Canada are still able to make their payments if interest rates rise.
Effective June 1, buyers with uninsured mortgages (those who have a down payment of 20% or more) will face a qualifying rate of either the contracted rate plus 2%, or a rate of 5.25%, whichever is higher. That is up from the current stress test rate of 4.79%.
For buyers who have mortgage insurance (those with less than a 20% down payment), the federal government announced shortly after the OSFI announcement that the same rules will apply.
“Maintaining the health and stability of Canada’s housing market is essential to protecting middle-class families and to Canada’s broader economic recovery,” Finance Minister Christia Freeland said in a statement on the changes.
“The recent and rapid rise in housing prices is squeezing middle-class Canadians across the entire country and raises concerns about the stability of the overall market.”
HOW WILL THIS AFFECT BUYERS?
Some mortgage experts say the initial statements from the OSFI were unclear and led to confusion.
For example, when the new rules were first announced, some experts said that if you had a pre-approval from a lender before June 1, 2021, your lender would have the discretion whether to honour the current easier test rules even if you did not have a purchase by that date.
But the OSFI recently clarified that even with a pre-approval, you would need a signed Purchase and Sale Agreement (PSA) submitted before June 1 in order to qualify under the easier test. You will still qualify even if your sale closes after that date, as long as the Purchase and Sale Agreement is before June 1.
If you buy a property after that date, you will need to re-qualify under the new test rules.
If you are pre-approved, are still looking for a property and unlikely to make your purchase before June 1, talk to your mortgage broker or lender about how the new rules will affect you and how much you can spend.
“It would have been helpful had OSFI noted this in a consumer FAQ on April 8, when the new stress test was announced. That would have avoided borrower confusion,” writes veteran financial commentator Rob McLister in a column on the website rates.ca.
You can read his post at https://rates.ca/resources/update-pre-approvals-and-stress-test
If you need to refinance your mortgage, McLister says the lenders he’s heard from say that as long as you apply before June 1, you would fall under the current easier rules. He recommends you contact your lender to be sure.
If you’re considering buying or selling property in the Ottawa area, I’d be happy to chat about the current market and conditions in your area and tell you about the expertise I offer.
With more than 30 years of experience helping clients buy and sell in Ottawa, I’ve dealt with a wide range of market conditions, and can help you navigate the market as buyer or seller. There are challenges for both buyers and sellers in the current market, but I’ve developed helpful strategies for both.
Feel free to give me a call, at 613-747-4747.