Launched in 2017 to cool down the overheated market, The stress test is the minimum threshold that anyone applying for a housing loan in Canada must meet. It will not make the loan itself more expensive. Instead, it ensures that anyone who gets a mortgage will be able to pay off when interest rates rise.

It is not difficult to find a five-year fixed mortgage loan with an interest rate of about 2%. A floating rate loan is even cheaper, while a fixed rate loan is a bit more.

Although interest rates are very low, looking at these numbers can see how much the impact of the higher stress test strips is. Currently, if buyers want to buy a house worth $400,000 and pay a down payment of $100,000, they need a mortgage of $300,000. Based on a 2% standard 25-year loan, the buyer will spend $1,270 per month. But under the new regulations, mortgage loan applications will be tested as an interest rate of 5.25%. At this level, the loan will cost the buyer more than 40%-$1,788 per month.

Even if the higher payment is only theoretical, if the buyer cannot pay the additional $518 per month based on their income level, overall debt burden, and other factors, the lender cannot lend them money. These buyers will have to find cheaper houses to pass the test. The impact on the entire market is to reduce the number of qualified borrowers in order to cool the market.

Cooling the market

James Laird, co-founder of the interest rate comparison website Ratehub.ca, said that the stress test will only take effect today, but there are already signs that the market may cool even before it is implemented.

He said in an interview: “This is not to say that the real estate market is slowing down, but it is slower than in March this year.” “No matter how the rules change, March 2021 may be the peak.”

The Canadian real estate market ushered in an unprecedented year in March 2021, as that month was the first 12 months of the pandemic. Home sales slowed to crawl Because of uncertainty. However, from spring, summer to autumn, under various COVID-related isolation and lockdown measures, the demand of Canadians at home ignited the fire in the real estate market, leading to a surge in transaction volume and prices for the rest of 2020 and this year.

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The average price of a house in Canada in March was US$716,828, a figure that has risen by more than 30% in a year. This is the largest annual increase on record.

Compared with March, April is usually a month of strong home sales, but Laird said that the market will slightly fall back in April 2021. Compared with last year, prices are still rising strongly, but as the discussion turns to policy makers can and should cool the real estate market.

He said: “We have seen some bubbles in the market earlier this year.”

According to Laird, the stress test seems likely to cool things down even further, reducing the average purchasing power by about 5%. He said that while potential buyers may complain about being turned away, in the long run, if house prices fall, this could be good news for everyone.

“The idea of ??policy makers is to slow down the rapid appreciation of home values ??that we see across the country,” he said. “In the long run, it actually makes it easier for first-time homebuyers to enter. [so] Maybe you can call it neutral. “

This is of course Neil Pettit’s view on this issue. Pettit and his fiancee Amanda Garant (Amanda Garant) have been looking for a house in Windsor, Ontario, where they live. But they are currently on the sidelines after losing in multiple bidding wars-even though they offer far more than the asking price each time.

“Our bid failed by $100,000,” he said in an interview. “I mean, there is no way.”

They all have a healthy income and saved a substantial down payment, so they said that the new stress test is unlikely to affect them. Nevertheless, they are happy to see the government intervene.

Pettit said: “Once you raise interest rates, you may not find a house you can afford.” “So I think from my point of view, it makes sense for the government to pull this lever slightly.”

Although the couple still want to buy, they are not in a hurry to do so. After experiencing a frenetic house hunt and failing, they believe that they will not get into trouble.

“We were very careful when looking for it to make sure it was within our budget,” Pettit said. “It’s not a budget that the bank says we can afford.”