'Uncharted territory': What rising rates mean for homebuyers

Whether you’re a first-time homebuyer or an existing homeowner, the dynamics of the housing market are quickly changing as borrowing costs soar.

For those looking to purchase a property, they might be pleased that home prices have fallen over the past few months — but buyers now face the toughest stress test since the requirement was first introduced.

“First-time homebuyers, or people that are looking at breaking into the market, they're having to go through more stringent stress testing today than clients have had to in the past,” said Joe Sammut, a broker at Ontario-based Mortgage Architects, in a phone interview.

The mortgage stress test (or minimum qualifying rate) requires borrowers to prove they can handle their mortgage payment at the greater of 5.25 per cent or their contract rate plus two percentage points. With many variable rates now sitting at just north of four per cent, many buyers are having to qualify for a mortgage at six per cent or higher, rendering the 5.25 per cent threshold essentially not applicable.

Rob McLister, a mortgage strategist with MortgageLogic.news, said based on the lowest nationally-available variable rate for an uninsured borrower – 4.15 per cent at Alterna Bank – a homebuyer would be stress tested at a rate of 6.15 per cent.

His math indicates the qualifying rate would cut the purchasing power for a typical prime mortgage borrower almost eight per cent.

“For a household earning $100,000 a year and putting 20 per cent down on a new home, that cuts their maximum possible purchase price by almost $47,000, assuming a 30-year amortization and no other debts,” he said in an email.

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