We’ve heard a lot of buzz lately from anxious first time home buyers less than impressed by current housing prices in the GTA. But there are two things other than price making owning a home in Toronto even harder:
- The new mortgage stress test and
- A threat of rising property transfer taxes
Here we break both conundrums down to explain why this could be bad news for already strapped home buyers.
The New and Improved Stress Test
The government continues to find ways to gain control over sky high housing prices across most of Canada. Here in Toronto we know the prices are unmanageable for many people right now. However, with the government’s recent change to the already difficult to pass mortgage stress test, home buyers will be hard pressed to meet the requirements. They now have to afford either 5.25% interest rates, or a rate 2% higher than the borrower’s mortgage rate – whichever is higher. So the new test has added about .5% more to the affordability bar.
What the Heck is the Stress Test?
If you’re new to the home buyer scene you probably missed the 2017 stress test launch. Designed to cool the market down, it set a minimum threshold would-be home buyers had to meet to qualify for a mortgage. Keep in mind the test doesn’t change how much a buyer pays for their mortgage. Instead, what it does is makes sure that if rates rise from the mortgage you qualify for now, you’ll still afford your mortgage at rates up to 5.25% or 2% above whatever the current mortgage rate is when you apply. In a roundabout way it’s good for buyers as what it does is protect you from losing your home if interest rates rise. Instead of lenders throwing mortgages to anyone who wants one, it holds banks a little more accountable for lending to people who really can’t afford a mortgage in the real world. It will also in theory prevent banks from lending so many high ratio mortgages and reduce how many buyers are out there. The less buyers, the higher the housing inventory and the more chance there is for prices to drop, or at least steady out.
But Aren’t Rates at Record Lows?
Good question! Yep, they sure are. In fact they tend to sit at about 2% for a 5-year fixed rate. But the thing is, you have to put the numbers in perspective to see how the stress test makes it harder to own a home. So how does it look in actual dollars and sense?
- You find a home for $400,000
- You have an impressive down payment of $100,000
- At current rates, your mortgage costs $1,270 per month
- Apply the stress test which brings your mortgage rate up to 5.25%
- Your mortgage would cost $1,788 per month
That’s actually 40% higher, or $518 more of your income going towards your mortgage each month. We won’t get into trying to guess your income and how it actually impacts your overall expenses, but we will say that it’s highly recommended that no more than 30% to 32% of your gross annual income should be paid towards your mortgage. And of course, $400,000 in this market, well, let’s just say it ain’t gonna happen!
Threats of Increased Land Transfer Tax
Talk of an increased land transfer tax will add more to the end costs of some Toronto home purchases. Although the increase would only apply to homes over $2 million, this type of hike tends to have a ripple effect. Right now the land transfer taxes in Toronto provide about $700 million each year. The proposed hike of 1% would add another $30 million potentially. The city claims this money would go towards affordable housing, which is quite honourable. However, it will also have a trickle down effect on home buyers because people who would usually be selling their current homes to move on up the real estate ladder, won’t be selling due to the tax. In turn, their more affordable “starter” homes won’t be available. In a market where inventory is already painfully tight, this reduces the amount of homes on the market, forcing prices up.
Reviewing the Situation
At the time we wrote this blog, housing prices were plateauing, but were still quite high. In June, the average semi-detached had dipped by almost 2% to $1,089,536 and a detached dropped by 1% to $1,699,881. If we try to put things in perspective, if the stress test helps cool things down even further, less buyers on the market is kind of like having more houses on the market. This in turn could lead to more affordable prices. So while you might feel the stress test couldn’t come at a worse time for you, it could work in your favour. We have to keep in mind that as the pandemic restrictions lift, we’ll be welcoming more newcomers to the GTA looking for housing. This increases competition. As for the land transfer tax hike, that is yet to be seen. So, between the potential cooling down of prices, less people qualifying for a mortgage, newcomers arriving in the city and the chance less starter homes will be listed due to the land transfer hike, what is most likely to happen is that everything balances out, so things remain neutral.
The Bottom Line
The bottom line here is that as long as you have a solid income, and respectable down payment, you will qualify for a mortgage. As well, despite the threat of increased land transfer taxes, the stress test will help reduce your competition and make it easier to find a home, hopefully at a more reasonable price than we saw earlier in the year. If you don’t qualify for a mortgage? Then maybe let out a sigh of relief, and keep saving for a down payment. A higher down payment helps reduce the amount of mortgage you need, which in turn helps increase your chances of qualifying. The last thing you want to do is buy a home that leaves you house poor, so your life is based on work, paying the mortgage, and having very little money to do the things you love.