After 2 years of maintaining low rates, the bank of Canada hiked the key overnight rate in March. Between March and June, the fixed-rate mortgages increased by 66%.
According to James Laird, Co-CEO of Ratehub.ca and President of Canwise mortgage lender, “In every city, homebuyers require a lot more income to purchase the average home due to higher stress tests caused by increasing mortgage rates. Generally, for every 1% that the stress test increases, a household qualifies for about 10% less mortgage.” As a result, according to Laird, home prices will need to drop significantly further to offset the effects of the higher stress test. Unless that happens, home affordability will continue to be negatively impacted by the current rising rate environment.
Using March 2022 and June 2022 real estate data, Ratehub.ca has calculated the minimum annual income needed to buy a home in Canada’s major cities.
Some key takeaways are,
- Homebuyers would have to earn between $8,660 and $35,760 more in additional annual income to buy a home in June compared to March.
- While home prices were down for the month of June in cities like Toronto, Vancouver, Winnipeg, Ottawa, and Hamilton, the income required to purchase a home in these markets still remains higher due to stress test rates.
- Victoria saw the biggest increase, with $35,760 in additional income required, with Vancouver close behind, requiring an additional $31,730.
What it means for a homebuyer is that – irrespective of the decrease in the home price across the country, the rising mortgage will impact the stress test making it more difficult to afford a home. Since you will now be stress tested at your contract rate + 2% (because this will always be higher than the qualifying rate of 5.25%. The ideal thing to do now is to look for the best mortgage rate available.
