Stressed and scrambling: young Toronto buyers on the brink
The mortgage stress test now required for anyone who doesn’t have at least a 20 per cent down payment is creating near panic in some young would-be buyers in Toronto and Vancouver.
The federal stress test assesses borrowers’ ability to afford payments calculated using the posted interest rate which is 4.64 per cent, significantly higher than currently available negotiated rates which are as low as or lower than 2.5 per cent.
With less than a 20% down payment, home buyers must have mortgage insurance, which protects the lender from default.
Nearly half of potential buyers in Toronto and Vancouver do not have the necessary down payment and 20 per cent of these know they would fail the stress test, according to a survey by Mortgage Professionals of Canada.
“Next generation homebuyers in the Greater Toronto Area and Vancouver have the highest stress levels around home purchasing decisions and are the least optimistic,” the survey found.
The survey asked consumers who do not meet the stress test how they would proceed. The respondents said they had three options, all stress inducing: scramble to find the extra money, buy a less expensive home or delay their purchase.
About a third said they would ask their family for money and 16 per cent would try to borrow more money from a financial institution.
In Toronto and Vancouver a home buyer would need, respectively, $105,000 and $120,000 in cash to cover a 20 per cent down payment on a typical condominium apartment, the lowest-cost option in either market.
“Rather than decreasing debt load, the stress test is driving some consumers to uninsured lending options with sometimes significantly higher interest rates, thereby shifting the debt load of the most vulnerable consumers away from the stability of mortgage insurance,” noted Paul Taylor, president and CEO of Mortgage Professionals Canada.