The Mortgage Stress Test Troubles Just Got Worse

CMHC reported that the 2019 national apartment vacancy rate was down to 2.2%. Yes, because the stress test does not allow younger people without a big income to buy even an entry level condos or townhouses. Yes, it’s fine to pay triple the amount in rent – but heavens forbid they want to become home owners. Another way the Federal Government, through CMHC has absolutely messed up the free market system. But it does reward landlords with huge rent increases since their renters don’t have the option of purchasing and landlords don’t use a stress-test.

To make things worse, CMHC tightened up the rules even more to put the brakes on home sales in the middle of a no home sales market. Your total payments from credit cards to your car, to the new mortgage, taxes and utilities now can’t exceed 35% of your gross income. That’s down from 39%. So someone making $50,000 just had their ability to get a mortgage reduced by $167 a month. Plus you now need a credit score of 680 or higher – up from 600 and you can no longer borrow the minimum 5% down payment.

The person making $50,000 in our example can have 35% maximum going towards all bills. That’s $1,458 a month. That’s an easy calculation before ever even thinking about becoming a home owner. That has to include taxes (let’s just use $300 a month) and utilities (most lenders us a flat $100). Deduct that $400 from the maximum allowed leaves this person $1,058 for the actual mortgage.

Since it’s most likely to be a condo or townhouse, the condo fees have to be in that 35% maximum debt, too. You’d be hard pressed to find a condo fee under $250. OK, so condo fees, utilities and taxes off the top brings it down to $800 left. Next hurdle is that you need to qualify for a mortgage rate 2% higher than actual. So rough numbers is that you need to do the calculations on about a 5% mortgage rate even though you’ll be under 3% in your actual payment. And that’s a max of $135,000. And don’t forget that this is 35% of all debt. So this math is all assuming the person has no car payments, no student loans and zero balance on their credit card. If it’s someone with a $300 student loan, it’d be a maximum mortgage under $90,000. Or wait until the student loan is paid off in 20-years before every being able to buy a home.

Tell me what you can buy for $135,000 in the Okanagan – or anywhere else for that matter. And tell me what 20 or 30 something is paying under $800 rent for anything other than a garage.

Sure the stress test has a purpose. But that should be to slow down the one million dollar buyers with a 95% mortgage. Instead, it’s the law of unintended consequences of hitting the entry level buyers.

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