July 4, 2024 • 5 mins
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EPISODE DESCRIPTION
In this episode, Tom breaks down the differences if you were to purchase a property from 2022 through to 2025 and beyond, and how interest rates and the stress test significantly affect your borrowing power.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:08):
are much higher than where theywere say back in the COVID days,
we have lower affordability whenit comes to buying a house and
qualifying for a mortgage.
So what I mean by that is the
stress test has a direct impact onhow much you can qualify for a
mortgage.
So in this video, we're going to
be breaking down the differencesfrom back in 2022, all the way up
(00:28):
to 2023.
And today, and we're also going to
give you a hypothetical numberbased off of one to two years out
from now.
So stick around to the end of the
video, because you might actuallybe shocked as to how much we can
afford today, and the actualhousehold income we need in order
to qualify for the mortgageexample that we're going to give
you.
So before we get into all the
numbers, let's just break downwhat the actual stress test means.
So the stress test, the governmentput it in place, and it's really
(00:50):
there to dictate how muchaffordability you can have when it
comes to qualifying for amortgage.
So in other words, you have toqualify for a higher amount than
whatever your actual interest rateis.
So you're not just qualifying atthe rate that you get, you're
qualifying at the stress testrate.
So the stress test dictates thatyou have to qualify with either a
5.25%.
In other words, the benchmark
rate, or the interest rate plus2%.
(01:11):
So that contract rate also meansthe interest rate.
So to give an example, let's justsay today's rates are 3%, which we
all wish they were, they might getthere at some point.
But today, we are not at 3%.
But let's just say we're at 3%,
then you're either qualifying atthree plus 2%.
So 5%, or the qualifying rate at5.25%.
So 5.25% is the higher rate.
So you're qualifying at that
(01:33):
versus the actual three plus 2%.
So I hope that makes sense.
But another example, let's justsay we have a 5% rate today, which
we do.
And then in that example, you're
qualifying at 7%.
Because if you add 2% to that,
it's higher than the benchmarkrate of 5.25%.
So as you can see, as ratesincrease, the affordability
(01:54):
becomes lower because you'rehaving to qualify at a higher
amount.
So now that we kind of laid out
the foundation in terms of how thestress test works, let's go
through the numbers and comparethe different years.
In this example, we're going touse a purchase price of $750, a
down payment amount of $50K, and amortgage amount of $700K.
So back in 2022, you had aninterest rate of 2.5%, a
(02:15):
qualifying rate at 5.25%.
Because again, the stress test, if
you're adding 2% to that 2.5%,that's four and a half percent,
which is lower than the benchmark.
So then we're qualifying at the
benchmark rate of 5.25%.
The monthly payment on that,
again, 700k mortgage would be$3,262.
And the income needed in order toqualify for that mortgage would be
(02:35):
135k a year.
Now let's compare that to 2023 and
show you the numbers there.
So the interest rate in 2023, this
is the peak of where rates were atwas 6.5%.
And the qualifying rate on thatwould then be 8.5%, which is quite
a bit of a difference there.
If you compare that to 2022, the
(02:55):
monthly payment on that is $4,877.
So an increase to your mortgage
payment per month at $1,615.
So that's a 49.5% higher payment,
so quite significant.
And the income needed in that
regard would be 180k.
Because again, we're having to
qualify at a higher stress testrate.
So now let's look at today.
And this is where things might
(03:16):
actually kind of surprise you.
interest rates today are 5%.
So again, when I'm talking aboutthe actual interest rates, I'm
using an average, we have somelower than 5%, we have some higher
than 5%, for the most part dippingbelow 5%.
But we're going gonna beconservative.
The qualifying rate on that wouldthen be 7%.
The monthly payment, $4,072.
We're gonna have a decrease of
(03:37):
$805 per month, so 11% lower, andthe income needed is 160K.
So we're getting there.
If you wanna compare this back to
2022, the income needed was 135K.
Today, it's 160.
If you go back to 2023, we had180K that we needed.
So we're on the right trajectory.
And if you can compare that to one
to two years out from today, nowwe're going to use some
(03:59):
hypothetical numbers.
But we all know rates are going to
continue to decrease.
It might take a bit longer than we
all hope for, but we do know theywill be decreasing.
So if we use an interest rate ofso 4%, only 1% lower than what
we're hope but for, we do knowthey will be decreasing.
So if we use an interest rate of4%, so only 1% lower than what
(04:20):
we're at today, the qualifyingrate on that would then be 6%.
The monthly mortgage payment wouldbe $3,683.
The decrease to that would be$389.
So another 9.5% lower, and theincome needed is 145.
So if you compare that to 2022,it's only 10k more from an income
perspective.
So yes, we're not there yet.
But it might happen sooner ratherthan later.
We don't know it might happenlater than sooner.
We really don't know what the Bankof Canada is going to be doing.
(04:40):
We've already seen that onedecrease, whether they decrease in
July, or if they wait tillSeptember, we shall see.
But point being, if you arewaiting on the sidelines, this
isn't to say, hey, you got to goout there shopping right now.
But with that being said, we allknow that once rates start
decreasing even more, a lot ofpeople are going to be flooding
back to the market and prices willbe continuing to increase at a
(05:03):
pretty significant amount.
So that's my opinion.
I would love to hear yourthoughts.
Comment down below.
We'll see you on the next week's
video.
Cheers.
are much higher than where theywere say back in the COVID days,
we have lower affordability whenit comes to buying a house and
qualifying for a mortgage.
So what I mean by that is the
stress test has a direct impact onhow much you can qualify for a
mortgage.
So in this video, we're going to
be breaking down the differencesfrom back in 2022, all the way up
(00:28):
to 2023.
And today, and we're also going to
give you a hypothetical numberbased off of one to two years out
from now.
So stick around to the end of the
video, because you might actuallybe shocked as to how much we can
afford today, and the actualhousehold income we need in order
to qualify for the mortgageexample that we're going to give
you.
So before we get into all the
numbers, let's just break downwhat the actual stress test means.
So the stress test, the governmentput it in place, and it's really
(00:50):
there to dictate how muchaffordability you can have when it
comes to qualifying for amortgage.
So in other words, you have toqualify for a higher amount than
whatever your actual interest rateis.
So you're not just qualifying atthe rate that you get, you're
qualifying at the stress testrate.
So the stress test dictates thatyou have to qualify with either a
5.25%.
In other words, the benchmark
rate, or the interest rate plus2%.
(01:11):
So that contract rate also meansthe interest rate.
So to give an example, let's justsay today's rates are 3%, which we
all wish they were, they might getthere at some point.
But today, we are not at 3%.
But let's just say we're at 3%,
then you're either qualifying atthree plus 2%.
So 5%, or the qualifying rate at5.25%.
So 5.25% is the higher rate.
So you're qualifying at that
(01:33):
versus the actual three plus 2%.
So I hope that makes sense.
But another example, let's justsay we have a 5% rate today, which
we do.
And then in that example, you're
qualifying at 7%.
Because if you add 2% to that,
it's higher than the benchmarkrate of 5.25%.
So as you can see, as ratesincrease, the affordability
(01:54):
becomes lower because you'rehaving to qualify at a higher
amount.
So now that we kind of laid out
the foundation in terms of how thestress test works, let's go
through the numbers and comparethe different years.
In this example, we're going touse a purchase price of $750, a
down payment amount of $50K, and amortgage amount of $700K.
So back in 2022, you had aninterest rate of 2.5%, a
(02:15):
qualifying rate at 5.25%.
Because again, the stress test, if
you're adding 2% to that 2.5%,that's four and a half percent,
which is lower than the benchmark.
So then we're qualifying at the
benchmark rate of 5.25%.
The monthly payment on that,
again, 700k mortgage would be$3,262.
And the income needed in order toqualify for that mortgage would be
(02:35):
135k a year.
Now let's compare that to 2023 and
show you the numbers there.
So the interest rate in 2023, this
is the peak of where rates were atwas 6.5%.
And the qualifying rate on thatwould then be 8.5%, which is quite
a bit of a difference there.
If you compare that to 2022, the
(02:55):
monthly payment on that is $4,877.
So an increase to your mortgage
payment per month at $1,615.
So that's a 49.5% higher payment,
so quite significant.
And the income needed in that
regard would be 180k.
Because again, we're having to
qualify at a higher stress testrate.
So now let's look at today.
And this is where things might
(03:16):
actually kind of surprise you.
interest rates today are 5%.
So again, when I'm talking aboutthe actual interest rates, I'm
using an average, we have somelower than 5%, we have some higher
than 5%, for the most part dippingbelow 5%.
But we're going gonna beconservative.
The qualifying rate on that wouldthen be 7%.
The monthly payment, $4,072.
We're gonna have a decrease of
(03:37):
$805 per month, so 11% lower, andthe income needed is 160K.
So we're getting there.
If you wanna compare this back to
2022, the income needed was 135K.
Today, it's 160.
If you go back to 2023, we had180K that we needed.
So we're on the right trajectory.
And if you can compare that to one
to two years out from today, nowwe're going to use some
(03:59):
hypothetical numbers.
But we all know rates are going to
continue to decrease.
It might take a bit longer than we
all hope for, but we do know theywill be decreasing.
So if we use an interest rate ofso 4%, only 1% lower than what
we're hope but for, we do knowthey will be decreasing.
So if we use an interest rate of4%, so only 1% lower than what
(04:20):
we're at today, the qualifyingrate on that would then be 6%.
The monthly mortgage payment wouldbe $3,683.
The decrease to that would be$389.
So another 9.5% lower, and theincome needed is 145.
So if you compare that to 2022,it's only 10k more from an income
perspective.
So yes, we're not there yet.
But it might happen sooner ratherthan later.
We don't know it might happenlater than sooner.
We really don't know what the Bankof Canada is going to be doing.
(04:40):
We've already seen that onedecrease, whether they decrease in
July, or if they wait tillSeptember, we shall see.
But point being, if you arewaiting on the sidelines, this
isn't to say, hey, you got to goout there shopping right now.
But with that being said, we allknow that once rates start
decreasing even more, a lot ofpeople are going to be flooding
back to the market and prices willbe continuing to increase at a
(05:03):
pretty significant amount.
So that's my opinion.
I would love to hear yourthoughts.
Comment down below.
We'll see you on the next week's
video.
Cheers.
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