Home Buying #Real Estate

How rate hikes affect the mortgage stress test & home affordability


Today we sat down and chatted with Serge, Mortgage Development Manager, and had him answer some of the most commonly asked questions we’re seeing in the mortgage industry this month. Read on, and let us help you worry a little less!

With the recent rate hikes, has it gotten harder to get approved for a mortgage? What is the overall impact on the stress test? 

Mainly impacting the fixed rate. Since the stress test rule is to use to higher of 5.25% (currently) or contractual rate + 2%, we end up in situation where current variable rate are being tested at 5.25% vs. Fixed rate at Contract + 2%.

We’re seeing the early signals of a cooling market, where home prices are finally falling; however, interest rates are now high – Is there a scenario where the potential buyer can win out? 

Market is cooling down mainly because of the uncertainty caused by Inflation and rate hikes. The inventory of property is still quite low and serious buyers are still facing a very competitive market. Until the inventory increases, buyers have to be prepared to move fast

Do you have any tips for first time home buyers who are struggling due to the rate hikes and the mortgage stress test?

Seek advice and make sure your budget is on track. Although the stress test may impact certain buyers it is crucial to also consider the budget. Qualifying for a mortgage is one thing but making sure you can afford it is too often looked at late in the process and unfortunately sometimes it’s too late. The budget exercise will confirm if you can allocate more funds towards your mortgage obligation or simply lower your purchasing price.”

Do you have any tips for first time home buyers who are struggling with pre approval due to the rate hikes and the mortgage stress test?

“Currently and depending on your risk tolerance you could potentially be limited as far as affordability goes because of qualification criteria between Fixed and Variable. The stress test rules described earlier are currently limiting affordability for certain home buyers and mortgage applications in general aiming for a fixed rate. Although there are many advantages to a variable product, at no point in time should you go for a variable rate if your risk tolerance is not in line with the product selected. Seek advice in order to make an informed decision.

What do you think could be done to help improve home affordability?

“It’s the basic law of supply and demand … inventory will improve accessibility and affordability. Many initiatives are underway to improve supply such as new residential construction and we have seen that industry increase by 13% last year, growth is expected to continue for the next few years at minimum.  

What are some areas in Canada that are still relatively affordable for people? 

According to data compiled by the Canadian Real Estate Association (CREA) New-Brunswick used to be the most affordable province but lost its ranking to Saskatchewan after an increase in home prices by 34,2% compared to 3 years ago. Depending on where you live there are still many micro-market in all provinces that are more affordable.” 

Is it better to opt for a variable rate mortgage or a fixed rate mortgage with the current stress test? Does this corner people into feeling they have to take a variable rate?

“Naturally, yes unfortunately, but if you have to choose variable to qualify, especially if you are not comfortable with the added risk that comes with the product, this should be a critical red flag that you must seek advice and review your budget in order to make an informed decision.”

How many more rate hikes do you project for the rest of 2022? Do you think it’ll continue in 2023?

“Yes, but almost impossible to predict to what extent. We need to keep an eye on the different markets and announcements to see what the impact would be.”

Final Thoughts

Interest rates are the lowest they will be through 2022 today and home prices are becoming more favorable. Chat with a nesto mortgage expert and see what’s possible for your unique situation today: 1-888-614-3589


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