When the pandemic began, extremely low borrowing costs raised concerns that mortgage payments could not be maintained by Canadians if interest rates were to increase higher than the qualifying rates. As of June 1, 2021, the Office of the Superintendent of Financial Institutions (OFSI) implemented a stress test for Canadians to apply for a mortgage. Simply put, the mortgage stress test was to determine if you would still be able to afford the mortgage payments should interest rates rise. This meant that borrowers needed to qualify with a much higher interest rate.
The minimum qualifying rate that OFSI established was either 200 basis points (2 percent) higher than offered rate or 5.25% which ever resulted in a higher rate.
The problem homebuyers now face is that the bank of Canada’s prime interest rate as of November 17th, 2022 has risen to levels not seen in more than a decade to 5.95%. Depending on the timeframe and terms, the average 30 year fixed mortgage rate in Canada sits at 7.3%.
Even though we are no longer at record lows, the OFSI rule still applies meaning that you would need to qualify for your mortgage using a rate that is 2 percent higher at 9.3%. The purchasing power of the homebuyer is drastically decreased with higher interests rate to begin with and having the stress test still in place, qualifying now has become very difficult for many homebuyers.
Given that the current economic environment has changed since the start of the pandemic, OFSI should revisit the stress test rules to reflect the current conditions. Affordability in large cities such as Toronto and Vancouver have been a concern for years and high interest rates compound this problem further.
I recently sold the perfect downtown Toronto condo for a first time home buyer. Located at 22 leader Lane at the King Edward Residences, this one bedroom condo for sale offered high end finishes, full service building amenities and a superb location in downtown Toronto being steps to the financial district and the King Street Station on the Yonge Subway line. The unit was 555 square feet and sold for $549,800, just under $1000 per square foot.
In order to avoid CMHC insurance for mortgage default protection, a down payment of 20% is required for an amount of $109,000. The monthly mortgage amount would then equate to $2600 per month. With the higher interest rate, this amount is $600 more than what the mortgage amount would have been at the beginning of the year when mortgage rates 3 percent lower. A homebuyer also needs to factor in property taxes and monthly maintenance fees, which raises the monthly commitment to almost $4000 per month in order to afford this Toronto condo unit. Now this is definitely not pocket change for many people but if you are able to put money towards owning your own home instead of renting, it is a great way to create wealth by forced savings.
As always, I recommend doing your homework first by getting a mortgage pre-approval to know your maximum borrowing amount and what monthly payments you are comfortable with making before making a purchase in Toronto’s real estate market. Finding the right Toronto condo for sale or Toronto Home for sale that fits in your budget is key to real estate in the long run. There are many different variables that affect prices of Toronto condos and by balancing criteria like size, location, age, finishes, I am sure we can find the right Toronto Condo for sale that is just perfect for you.