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Ontario Real Estate Panel - Mortgage Stress Test Explained - Episode 1

Saturday May 08th, 2021


Ontario Real Estate Panel - Mortgage Stress Test Explained - Episode 1


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Mike Crisp: [00:00:00] [00:00:00] Hello, and welcome to the very first Real Estate panel discussion. I want to introduce Davor, I've got Elyse with me and I've also got Melody and, I'm Mike Crisp. From Royal Le Page Metal town in the Halton Hills area. Our objective is really to provide you with stuff that's happening in real estate, and really try to simplify some of those issues.

[00:00:26] We want to keep you informed and we want to help you make a wise real estate decision.  And we're going to try to really keep it short and we're going to try to keep it simple.  Why us and what makes us different? Well, you know, I'll tell you, we all come from four different brokerages, we all also come from four different areas within Ontario, and as you probably can see, we're four different age groups. Of course, me being the young one. But I'll tell you, we do have one thing definitely in common, and that's a passion for real estate. And also a common interest in ensuring that we can be fully transparent with [00:01:00] what's happening within our industry. You know, we're going to try to cover some topics with you that everybody's talking about this week. It's the mortgage stress test. And with that, I'm going to pass it over to melody. Who's going to give you the first update.

[00:01:12] Melody: [00:01:12] Perfect. Thanks, Mike. So I'm Melody, I'm based in Toronto and I am with Forest Hill real estate inc brokerage in Toronto and I'd be happy to kick us off with the mortgage stress test.

[00:01:24] So I'll start out by giving a little bit of the history about it.  In late 2017, the federal government introduced Market stress tests for anyone who was applying for or renewing a home loan. And if you're like nearly half the Canadians you may not understand what the test is or who it affects. And with the announcement made last year on April 6, 20 20, there was even more confusion among Canadians.

[00:01:48] So in other words, if you have a mortgage or plan to get one, the stress test applies to you. So what is the stress test? First off, it's not really a test, rather. It's more of a set of rules. Banks must [00:02:00] now use to determine if you qualify for a mortgage and if so, how much you can borrow. Over to you Elyse to get us some more information.

[00:02:08] Elyse: [00:02:08] Okay. Hi, my name's Elise Bouwmeester and I work for Red and White Realty in the Waterloo region.  Specifically, I'm in Cambridge. I'm going to tell you why this was created. So the new mortgage rules exist to protect borrowers like you interest rates are at a historic low, and they can, and they will go up.

[00:02:26] So the government just wants to make sure that you'll still be able to afford your mortgage payments when this happens. Otherwise, if you can't afford your payments and you default on your mortgage, you could risk losing your home. Mike, can you tell us a little bit about how

[00:02:39] this works?

[00:02:41] Mike Crisp: [00:02:41] Absolutely.  You know, I'll tell you first,  at least one thing that hasn't changed and that is your credit score.

[00:02:46] So ultimately that's how they're going to come up with your rate and that stays the same, but under the stress test rules, that won't be the interest rate that they're actually basing it on. What they're going to be looking at is they're going to be looking at, as [00:03:00] you just indicated,  they're going to be looking at a higher rate and, you know, that's to ensure that you're going to be able to cover the mortgage when the rates and they will go up.

[00:03:09] So what will the lender use? Well, really in both scenarios. And when I say both. In uninsured mortgages. And those are mortgages where you have 20% or more to put down or insured mortgages where you have less than 20%. It is going to be the weekly average of the five-year rate on all mortgages plus 2%. And the other one is the rate offered by your lender plus 2%, whichever of the two is greater. And let me try for all of us to put that in really simple terms. So if you wanted to borrow $400,000 and get the current rate at 2.5%, you, our monthly payment would be about $1,800 under these new circumstances, you'll still have that rate, right?

[00:03:53] But you will be eligible. They will base your rate on $2,400 with the additional 2%. So that's an [00:04:00] increase of $600 on a monthly basis that you'll have to show you have earnings that you'll be able to cover. And again, if your mortgage has doubled it's $800,000, then that'd be $1,200. So this could be a game-changer for some, right?

[00:04:13] Elyse?

[00:04:14] Elyse: [00:04:14] Definitely. So the bank's gonna use two main figures. They're going to use your GDS and they're going to use your TDS. So your GDS is your gross debt service ratio. This is just a percentage of your monthly income that will cover your housing costs. This includes your mortgage, your heat, your hydro, and your property tax.

[00:04:34] Now this percentage should be 32% of your income. We also have your TDS. So the total debt service ratio is an outstanding personal debt. So this can also include your mortgage, your car loans, your credit card debt, your line of credit. This should be no more than 40%. Okay. Davor over to you.

[00:04:55] Davor: [00:04:55] Thanks Elyse.

[00:04:56] Hi everyone. My name is Davor. I'm a realtor here in Ottawa. I [00:05:00] worked for Waybridge Realty. And the first question I want to tackle is what does the stress test mean for the borrowers? Going back to what the test was designed to tackle. And that's the household debt issue in Canada, the mortgage stress test essentially makes it a lot harder for mortgage applicants to qualify for the desired mortgages.

[00:05:17] What this means for the borrowers is something along the lines of a reality check. The lenders are trying to make sure that the amounts you borrow are not going to make your house poor when the mortgage rates do go up. If you had your sights set on a home that is in an 800 K range, perhaps you ought to consider a home in a 600 K range, because it might be more within financial feasibility for you.

[00:05:41] With limited supply and an increase in demand the change, will add an additional cooling effect by making it even harder than it really is for first-time homebuyers to enter the market. So is there actually a way to sidestep this test? The simple answer is no.  The Canadian banks and other lending institutions [00:06:00] are mandated to enforce these rules in order to limit the risk exposure.

[00:06:04] So, what you can do is make sure your credit wordiness is, on par that you pay down your debts and save up more. And if you do require a mortgage it's in a higher amount, got a co-signer.

[00:06:17] So this concluded our RE panel episode one. I'm very excited about that. If you like, Our episode, please,  click on like and subscribe and let us know if there are any subjects that you would like us to tackle in the future.

[00:06:31] Thank you.

[00:06:33] Melody: [00:06:33] Bye.


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