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Canadian home buyers now need even more income to qualify for a mortgage to buy a home amid higher interest rates, even as prices fall in many major cities.
Ratehub.ca released a report last month finding the higher threshold for the OSFI (Office of the Superintendent of Financial Institutions) stress test has increased the annual income required to qualify for a mortgage in major cities.
OSFI put the stress test in place in the late 2010s to ensure buyers could absorb higher interest rates. It requires buyers to qualify at the greater of two interest rates. One is the Bank of Canada benchmark five-year, fixed rate. The other is the borrower’s mortgage rate plus two percentage points. Prior to interest rates rising, most borrowers qualified at 5.25 per cent — the benchmark rate at the time — because their offered rate plus two percentage points was lower than the benchmark. Today, most offered rates — with the addition of two percentage points — are higher than the current benchmark of 6.79 per cent.
Basing its findings on a 20 per cent down payment and the average five-year, fixed rate mortgage, Ratehub.ca found a Calgary buyer required $115,000 of income to get a mortgage for the average priced home of $548,300 in June.
That’s because, under the stress test, the threshold to qualify was 7.72 per cent even though the average mortgage rate was 5.72 per cent.
Yet required income climbed higher in July to $119,600 not only because the average price had grown to $551,300. The average mortgage rate also increased to 6.12 per cent. In turn, buyers had to qualify at 8.12 per cent under the stress test rules to receive funding.
Even in cities where prices fell, income requirements grew. In Toronto, the price dropped $10,000 to about $1.61 million from June to July. Yet buyers required $235,250 of household income in July versus $229,800 in June to pass the stress test.