The Trend With Decreasing Stress Test Rates
The Stress Test rate benchmark has decreased as of recent years, from initially 5.34% to now 5.19% for the first time in 3 years. This 0.15% decrease is significant, as it can mean a lot of things about the Canadian realty industry.
What Does This Mean?
Well, this “Stress Test Rate” is actually Bank of Canada’s Qualifying Rate, which is the primary determinant of whether a person can take out a loan at any given institution. For example, if a person has annual gross income of $60,000 and is looking to take out a loan, they can qualify for a purchase price for as low as $265,000 with a 10% down payment at a 5.34% qualifying rate.
Change that qualifying rate to 5.19%, that same borrower qualifies for a $269,000 purchase price at 10% down payment. This is a $3,700 increase in borrowing ability.
Alternatively, just a few years ago, a person with an annual gross income of$80,000 and a 20% down payment can qualify for a $455,000 purchase price at a 5.34% Bank of Canada Qualifying Rate. Now at 5.19%, this purchase price increases to $462,000, yielding the person an increase of $5,600 in borrowing ability.
1.5%. That is the increase borrowers now have in their borrowing ability.
Ironic part of all these calculations, the stress test was implemented to protect consumers against rising interest rates. Their concern was that borrowers would not be able to cover their monthly payments when they came up for renewal.
Consider this: the highest 5-year interest rate since January 2010 is 3.79%.
Now, the highest 5-year fixed interest rate in the past 5-years is 3.24%.
The last time someone had to pay an interest rate above 5%? For one month in 2009 and before that, summer of 2008.
To Sum It Up…
What does this all mean? Well, while borrowers may take out larger loans now compared to before, it has become harder to qualify for a loan with banks. If you are looking to buy property in today’s market, consider inquiring with Leap Financial’s expert mortgage brokers; we will be happy to assist you secure a mortgage that’s right for you.