When Canada’s Big Six banks cut their 5-year fixed posted rates, a reduction in the stress test rate was and will ensue shortly. This will be the second time in the last 3 months that the stress rate has been reduced. It is expected to drop to 4.79% from 4.95%.
The reduction will make qualifying for a mortgage easier or allow some people to borrow fractionally more. To get an idea of how the new rate will work, a buyer earning $70,000 per year purchasing a property with a 5% down payment would roughly be able to afford $4,000 of extra home.
While the amount may not be huge in the scheme of today’s average home prices, on a market-wide basis, small buying power improvements are inflationary for home prices, pushing them upwards, other things being equal.
According to the current Bank of Canada governor Tiff Macklem, “interest rates are very low and they are going to be there for a long time.” He suggests that there will be no interest rate hikes for the next 2 or maybe 3 years.
These recent small reductions to the mortgage-qualifying rate are making homeownership affordable to a small degree, and it should be noted that there has been pressure on the government to change how the stress rate is being calculated.
While this has been acknowledged, any proposed changes by the government have been put on hold given the marketplace uncertainty that emerged in March this year due to the COVID 19 pandemic. However, as life begins to return to a semblance of normality, there may be an implementation of new test parameters in due course.
There seems to be some pent up demand currently in the housing market. Contact us if you would like to take advantage of the buying and selling opportunities that currently exist.