This week the price of five-year fixed mortgages blew past 5 per cent at most big banks. That’s a rate we haven’t seen in 14 years.
But the real head-spinner is the typical “stress test” rate.
To qualify for an uninsured five-year fixed bank mortgage you must prove you can afford a payment based on rates like 7.14 per cent. Government qualifying rules require it.
For most people that is one heck of a problem. On top of the 43 per cent burst in average home prices over the past 24 months, five-year fixed stress test rates have jumped almost 200 basis points in the past 90 days. That’s an astoundingly fast jump in mortgage qualifying rates, one we haven’t seen since 1994. (There are 100 basis points, or bps, in a percentage point.)
Why it’s so important
A 2021 CMHC survey found that two out of three of homebuyers bought the most home they could afford. The old saying “people buy payments, not houses” has perhaps never rung more true.
If real estate were a plane, soaring stress test rates are pure drag. They’re like trying to fly with air brakes and flaps fully extended. Odds are, you’re going down.
People know this, so more and more homeowners are rushing to sell as patient buyers lick their chops on the sidelines.
Nonetheless, for those with above-average debt loads who, for whatever reason, feel they must buy a home today and want to lock in but can’t pass the five-year fixed stress test, there are still options:
- try a credit union that doesn’t use the federal stress test;
- settle for a cheaper home;
- get a co-signor;
- scrounge up a bigger down payment;
- choose a variable rate instead, if suitable, as they’re currently much easier to qualify for given quirks in the government’s stress test formula.
Or, you can be a sideliner and hope prices continue falling amid tornado-like interest rate headwinds.
Consider the following …
On March 1 the typical government stress test rate on an uninsured five-year fixed mortgage was 5.25 per cent. Today, as noted above, it’s about 7.14 per cent or more at most big banks.
Economists are generally predicting a 15-per-cent to 24-per-cent drop in the national average home price by the end of this rate hike cycle. I’m not self-torturing enough to predict home prices but let’s take the middle and assume a 19.5-per-cent drop. That, by the way, is one percentage point more than prices fell from the peak in 2017.
If this scenario played out, other things being equal, falling home prices should more than fully offset the tougher mortgage stress test for new buyers. In other words, most people would find it easier to qualify for a mortgage on a new home.
So if you’re worried about the stress test kiboshing your home purchase, the answer might be as simple as waiting for the storm to pass.
Just know that waiting is not risk-free. Tens of thousands of Canadians are also waiting to buy the same dip you are. Meanwhile, new immigrants pour into the country and create more demand for a still-limited supply of homes.
That’s partly why not even Canada Mortgage and Housing Corp., the Bank of Canada and Bay Street economists – armed with the best housing data in the country – can time the market.
Big bank five-year fixed alternatives
If you’re a mortgage shopper worried about the Bank of Canada hiking far more than expected, the go-to insurance policy has long been a five-year fixed.
Unfortunately, as noted above, big banks have pushed the price of that insurance past 5 per cent for the first time since 2008.
If you want a better balance of rate protection, consider:
- A credit union like Community Savings. It still has Canada’s lowest five-year fixed rate at 3.89 per cent – available on insured and uninsured mortgages in British Columbia only. In Ontario there’s Meridian, it’s 70 bps below most big bank rates at 4.49 per cent on an uninsured five-year fixed. Check rate comparison sites online for other provinces.
- You could instead save a half-percentage point (50 bps) versus big bank five-year fixed rates by taking a four-year fixed. They’re still as low as 4.54 per cent through Alterna Bank, and even lower through some regional credit unions and brokers.
Most people have been refusing to lock in long term. That trend should continue as the probability of recession surges, resulting from historically swift central bank rate tightening, steep energy prices and nosebleed inflation. The market now expects a U-turn lower in rates well before a four-year mortgage would mature.
Add to that outlook the fact that Canada’s lowest nationally available floating rates are as much as 200-plus bps below big bank five-year fixed rates. Yet the bond market is only expecting another 225 bps of rate hikes. If market pricing is correct, that means variable rates likely won’t rise drastically above today’s five-year fixed rates.
Rates are as of Thursday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.