New stress test rules could be key for potential cottage buyers. On April 6, 2020, the federal government will implement new rules around mortgage lending, making it easier for cottagers to secure their dream property.
Under the current rules, anyone applying for a mortgage must pass the stress test, an evaluation that determines whether a buyer will be able to pay their mortgage if the interest rates get higher. The stress test was first introduced in January 2018 as a solution to managing the high household debt many Canadians are facing.
The stress test rate currently sits at 5.19 per cent, meaning that to pass the test and qualify for a loan, buyers must prove that they will be able to make mortgage payments at a 5.19 per cent interest rate. If the buyer fails the stress test, the lender is not allowed to loan them the money.
This rate, however, is set arbitrarily by Canada’s big banks, says Brent Richardson, a mortgage broker with Altrua Financial. “They basically get together, and they would set a rate based on their posted rates,” he says.
Under the current stress test rules, the rate is fixed, not reacting to the market, and is approximately two per cent higher than the mortgage rates quoted to most buyers. “The effect that [the stress test] has is that it lowers the buyer’s maximum or potential purchasing power by about 20 per cent,” Richardson says. “As a result, the stress test has made properties less affordable and cooled the real estate market.”
To fix this, the federal government is recalculating the stress test. It will now be based on “the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.”
This means that the new rates will be based on a floating average that reflects real market conditions. For instance, if the five-year fixed mortgage rate is 2.89 per cent, the stress test rate would be two percentage points higher, or 4.89 per cent. This is a bit lower than the rate that had been in use, Richardson says. “And the most important thing is that it’s not set arbitrarily.”
The revised rates will allow potential cottagers to boost their purchasing price. “In order to win the cottage of their dreams, they may need an extra $10,000 or $20,000 for a mortgage approval,” Richardson says. “This will help in those situations.”
Cottage mortgages also require more steps than a home mortgage, accounting for factors such as whether the cottage is winterized, whether it has potable water, and how accessible it is. But Richardson says that the new rules will not affect these factors. In fact, it is still “quite easy to qualify at the absolute lowest rates in the market on many cottages out there,” he says.
The updated stress test should encourage buyers in rural cottage markets, but its real impact will be seen in “hot and stimulated housing markets,” such as the Greater Toronto Area. “In general, we’re not seeing 10 bids on every cottage property like we do in Ottawa, Vancouver, or Toronto,” he says. “If you have 10 first-time home buyers who are all qualified for an extra $20,000 bidding on the same house, that’s probably going to move up the housing prices.”