'Bank of mom and dad': Millennial house hopes and the new mortgage stress test
On June 1, a tougher mortgage qualifying stress test came into effect in Canada, decreasing buying power.
Qualifying rates increased from 4.79 per cent to 5.25 per cent and hopeful first-time homebuyers are being hit the hardest.
Connor Stroh is getting ready to graduate university and wants to buy a home, but knows it likely won't happen for a while.
“I honestly think that's impossible right now," he said.
The 21-year-old says listing prices in Kitchener-Waterloo are way above any mortgage he would currently be approved for.
“The down payment was scary enough as it is, but now the stress test being raised makes it even harder," Stroh said.
Kitchener mortgage broker Tracy Valko says, for example, if you previously qualified for a $630,000 mortgage before June 1, your qualifying amount would change to $600,000 after that date.
“It's decreasing them about $30,000, which works out to be a five per cent difference," Valko said.
For potential first-time buyers, five per cent can make or break an opportunity to get into the market especially as competitive bidding wars have increased during the pandemic.
“Especially for first-time home buyers that have less than 20 per cent down, it is going to severly impact how much they qualify for,” Valko said.
According to the latest numbers from the Kitchener Waterloo Association of Realtors, the average sale price for all residential properties in the area was $757,906 in April 2021.
“I am either going to have to go to the bank of mom and dad for help or find a couple of co-signers. It's definitely intimidating,” Stroh said as he waited to meet with a mortgage broker.
“I still l have a couple of years to go, but I hope it’s not too hard,” he added.
Valko explained the long-term goal of the stiffened stress test is to help cool the hot market, which has been fueled by record low interest rates.
A tougher stress test means potential buyers with a higher debt to income ratio won’t be allowed to borrow as much, ultimately helping to protect the market and homeowners if interest rates increase.
Valko believes the government also needs to address another source of market pressure in order to solve the larger issue at hand of skyrocketing prices.
“The real issue here is the supply. We've got a lack of supply,” she said.
Valko says she’s seen a lot of first-time buyers priced out of their own communities.
As a university student, Stroh knows many people his age who have a lot of debt which will impact their ability to buy.
“I know some people who are tens of thousands of dollars in debt,” he said, referring to student loans alone.
He’s worried the lack of service jobs because of the pandemic may also put his generation behind when it comes to not only saving but paying off debt.
“The opportunities are very few and far between to earn an income at my age," he said.
For now, Stroh's dream of homeownership will have to wait, but if the long-term goal of the stress test plan prevails, it could mean he and other first-time buyers will get more for their money when they are ready to buy a few years down the road.
Despite feeling intimidated by the market, Stroh is making a financial plan to help him reach his goal.
“My advice is to stay positive and make sure you are speaking to a mortgage professional about where you’re financing is it,” Valko said.