The Federal Government of Canada in January 2018 introduced a mortgage “stress test” with the aim of discouraging unnecessary debt among its citizens. The test required all individuals (both new and renewal) borrowing funds from government-regulated lenders such as banks to provide evidence that they can afford their mortgage payments despite any rise in interest.
Well, it has been over a year now, and as expected a lot of debate has gone on about whether the new move would indeed help things or move them from bad to worse. There are those who support it claiming it does exactly that – protects borrowers—and there are the critics who say that the test will only make property buying difficult for young Canadians and plenty of first-time home buyers.
Today, let’s try and answer the question of whether the mortgage stress test has benefited the Toronto real estate industry.
Low Cost of Homes
Since the mortgage stress test was rolled, the Canadian real estate in its entirety has reportedly tried to press the government to make the requirements of first-time home buyers a little less stringent. The major key players hope that the insured mortgage’s amortization period be extended from 25 to 30 years.
Even with all that, those rules have actually helped many Canadian markets adjust the prices of properties. Homes in Toronto and other major cities in Canada now feature low prices compared to before the stress test. Home applicants can now enjoy up to 20% or more of reduced home value upfront. This is not good for sellers but it is great news for buyers.
Increase In Rent and Purchase Prices Of Low-End Homes
The mortgage stress test has some level of success when it comes to stabilization of home prices. However, these tough rules have also made homebuyers consider getting cheaper homes. This, in turn, has pushed the prices of low-end properties plus their rent in an upward trend. Hence, anyone trying to get into the market doesn’t have it easy.
Home Buyers Might Lose Their Purchasing Power
If you intend to purchase your home in fall, you probably worry about what the stress test will impact you. Compared to the prior real estate rules, there are some home buyers who will sadly lose up to 18% of their purchasing power. For instance, you might have to spend approximately $ 492K for a home you’d have bought for $600k before January 1st, 2018. If you especially live in Toronto where every buck counts, you might have to settle for a small townhouse or condo rather than a stand-alone house to qualify.
More People Go To Private Lenders
As mentioned before, the mortgage stress test doesn’t necessarily affect everyone in the same measure. It only applies if you are borrowing from federal-controlled financial institutions. To avoid these regulations, desperate buyers have already opted to work with private lenders. Although these offer high-interest rates, they are accessible.
Overall, the mortgage stress test has both negative and positive impacts on the Toronto real estate industry. Buyers are not only buying cheaper homes and borrowing from private lenders but they can enjoy buying some properties on at reduced prices than before the test. Sellers, on the other hand, suffer the low cost of their homes, particularly the ones that have high-end units.