Posted at 6:00 am
Since March it has become much more expensive to borrow a loan to buy a home, making home ownership even more prohibitive.
In Montreal, the annual gross income required to afford the purchase of a home sold at the median price has increased by $15,830 in four months. With recent rate hikes, you can now expect gross annual income to be $110,900, argues a publication from virtual mortgage broker Ratehub.ca.
In March, a median income of $95,070 was enough to afford a home of the same standard.
Ratehub.ca’s calculations are based on households’ maximum borrowing capacity. It also takes into account the effects of changes in mortgage rates and house prices.
The average price of a property in the Montreal area was $546,800 in June, a relatively stable price compared to the previous March.
The difference in required income between March and July is mainly explained by the stress test that borrowers must undergo to qualify for a mortgage loan.
This test is calculated using the higher of the following two interest rates: either the contractual interest rate on the loan plus 2 percentage points or 5.25%. Until March 2022, the test was based on a rate of 5.25%. Now it is often carried out at a rate of more than 7%.
Reached by phone, the spokesman for Ratehub.ca claims that the purchasing power of potential buyers is eroding.
Since March, the household that has reached the maximum of its creditworthiness has recorded a loss of purchasing power of 5 to 10%. For example, someone who could afford a $600,000 mortgage in February will have to settle for a $540,000 mortgage this summer.
Philippe Simard, Quebec Mortgage Manager at Ratehub.ca
“House prices need to fall significantly to neutralize the impact of rising mortgage rates on the stress test. If not, housing affordability will continue to be significantly impacted by the current environment of rising interest rates,” Mr Simard said in the press release publishing the above calculations.
All-round interest rate hike
The 5-year fixed rate on an insured loan, which is based on Canadian government bond rates, has risen from 2.99% to 5.14% at most major Canadian banks since March, according to Philippe Simard. Fixed-rate mortgages rose an average of 66% between March and June 2022 alone, Ratehub.ca points out in its publication. Today, some virtual lenders are offering 4.39% for a 5-year fixed rate. You must see the terms.
For its part, the floating rate on an insured loan, which is based on the prime rate, rose from 1.40% to 4.20% at standard lenders, again according to Mr Simard.
The Bank of Canada’s policy rate, which directly influences the policy rate for financial institutions, started the year at 0.25%. It rose to 0.50% in March, 1.0% in April, 1.50% in June and 2.50% on July 13.
Last week, a BMO economist said the Bank of Canada’s 100 basis point hike in July was tantamount to a blow to borrowers’ heads.
Some call for reforms. For example, since at least August 2021, the Association of Construction and Housing Professionals of Quebec (APCHQ) has called for a relaxation of the stress test to ease access to property.