There has been a lot of media attention in the past 24 hours about the Conservatives announcing that they want to revisit the stress test on mortgages as well as possibly look at bringing back the 30-year amortization on insured mortgages (those with less than 20% down payment). I want to show you how that could actually help purchasers here, assuming that you have a 5% down payment, either saved up or via a gift.
Using a household income of $50,000 and monthly debt of only $300 (which I know is very low), and a good credit rating, a buyer could qualify for a $210,000 home right now using the current stress test, which is 5.19%, more than 2% higher than typical interest rates.
Our industry group has been advocating for this test to be reduced as it is overly conservative and does not take into account many other factors that could change over 5 years, such as increased income and a reduced balance. If I do this same calculation using a 1% stress test (over current rates), the purchase price could go as high as $240,000 potentially. Again this is just an example to show that the current stress test is definitely impeding the buying power of people and in our city, that $30K can make quite a substantial difference in the home, especially for first-time buyers.
The other option being discussed is changing the amortization to allow for 30 years again. What this change does is reduce the monthly payment because the mortgage is now being calculated over a longer period of time. So in the example of a $210,000 home, the monthly payment would be $960 (using 2.79%) with a 25-year amortization, but it is reduced to $850 with a 30 year am. That $90 reduces your monthly debt load and also can allow for more purchasing power. My previous example of someone buying with our current stress test for $210,000 maximum could now purchase up to $225,000 if the 30-year amortization was used. Again, in our market, that $15,000 can be significant in the first time buyer market.
I believe that these are changes that can actually make a difference for first-time buyers in our market because of the entry-level price range in around $200,000.