Scott Dillingham: 00:21

Welcome back to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. Today, I'm going to talk about the stress test. You are eroding purchasing power when you are buying a home or an investment property. Now what the stress test is, is it's a government mandated guideline that the lenders have to follow when they're running the numbers to see what you qualify for.

Scott Dillingham: 00:45

So I'll give you an example. Let's pretend you're buying a home and your rate is 3%. That's what you're gonna be paying on. That's what your monthly payments are based on. Everything is based on this 3%.

Scott Dillingham: 00:59

Okay. But what the stress test is, is it's a higher rate. So as of today, it's 5.25 is the stress test rate. And you have to qualify as if that was your rate, even though you might be getting 3% today. Now, the reason for this is because the government has decided that if interest rates go up, they wanna still make sure that you can make your mortgage payments.

Scott Dillingham: 01:28

Because the last thing that they wanna do is you get a home, you qualify today, it comes up for renewal and you can't pay it. The payments go way too high because the rates are higher. So that's what the stress test does is it looks out into the future, giving you some cushion. So that way you can still afford the property if the rates go up. Okay.

Scott Dillingham: 01:48

So that's really what the stress test is. However, in our market right now, we have a lot of different things going on that can potentially increase the stress test rate and make it even more difficult for you to buy. And I realize this is is the last thing you wanna hear because the market is crazy and it already is hard to buy. So it's important that you pay attention to this message and you use the tips that I'm gonna share with you to make sure you're still maximizing your purchasing power while protecting yourself and getting the best rates while doing so. Pretty much when COVID came out, the bank of Canada lowered the rates by 1 a half percent was the total rate.

Scott Dillingham: 02:34

Now this is variable rates. The total discount that they gave to help spur the economy. So everything is tied to not everything, but a lot of things are tied to variable rates. Such as car loans and credit cards, regular loans, right. Mortgages.

Scott Dillingham: 02:51

There's so many things. So the government's thought was let's lower the rates that will help spur the economy and keep things going. Even though COVID is slowing down the economy. Now the reverse is happening. The restrictions, as of today, knock on wood, I don't want them to come back, but the restrictions have mainly lifted, and they have started to raise the rates.

Scott Dillingham: 03:14

Already, the government has raised the rate a quarter of a percent. Their goal is to quickly, maybe not quickly, but their goal in the short term is to get the rates back up to the pre COVID levels. So this means we can expect at least a 1.25% increase. Now there's different things going on. So this may or may not happen.

Scott Dillingham: 03:40

And what I mean by that is this. Say this brand new COVID wave comes and it's terrible and everybody's getting sick and there's more layoffs and closures and right. If that happens, they're not gonna raise the rates when the economy's struggling. But because it does look like it's mostly behind us, they're gonna start doing it, but it's very careful. They do it stage step by step.

Scott Dillingham: 04:04

It's not just overnight that they raise the rates. Now you might be asking yourself what that has to do with the stress test, and I'll explain that in a minute. But that's how they control the variable rates and the fixed rates is tied to the bond markets. So the governments do have influence over the bond market in the sense that, it's beyond what an investor would pay for a bond. The government can choose to buy up their own bonds, or they can choose to sell extra bonds.

Scott Dillingham: 04:31

By the government transacting in this way, it does have a direct input on the bond market pricing. And the bond market pricing is how the fixed rates are derived. Now I know I did speak about this in more detail in another episode, but it ties to this. It ties to what we're talking about today, which is the stress test and how your purchasing power is potentially eroding if you don't get into the market quickly. So I'm going to get into more of those details, but pretty much how the lenders qualify you is you're qualified at the stress test rates, or you have to qualify at 2% above what your actual rate is.

Scott Dillingham: 05:19

So for an example, let's say your rate is 3 a half percent. That is where some major banks are right now on a 5 year fixed is in the 3a half range. If you get a rate of 3a half, that means your stress test is 5a half. So that lowers your purchasing power. So a lot of people right now are wanting to go fixed because the government has stated that they wanna raise the variable rate, and all the lenders are making, their own predictions and speculation on how quickly they think it'll raise and by how much, and really nobody knows.

Scott Dillingham: 05:53

The government of Canada gets the final decision, and they base it on all these different variables. They could be educated guesses, but nobody really does know what's gonna happen. Well, because the variable rate is going up. A lot of people want the fixed rates right now. Now I'm still somebody that loves the variable.

Scott Dillingham: 06:13

That is the product that I always get. I know I'm biased towards it because that's what I have on all my properties. That's what my my process today and why I would still get the variables even if it does go up. Right? Say they do raise it a quarter, 1 a quarter percent to get back up to where it was pre COVID levels because the fixed rates have gone up so high that the variable rate might still be cheaper.

Scott Dillingham: 06:35

So right now we've got a lender who's at 1 and a half percent for the variable, just as an example. This is at the end of the March, end of March when I'm recording this. And if it goes up 1.25%, you're at 2.75%. Where the fixed rates I just mentioned, some banks are at 3 a half percent. Some even higher, like other lenders are even higher than that.

Scott Dillingham: 06:56

So potentially the variable rate is still actually cheaper, even if it does go up 1 and a quarter percent. Not in all cases again. So you need to speak to your mortgage lender and get their details, get their rates, that type of thing. You're hearing my rates that I'm discussing on the call. Right now our lowest price lender is at 2.79, but the average is around 3 a quarter to 3.64.

Scott Dillingham: 07:20

That's where they are for the fixed. So again, if you're looking to buy right now and your lender has higher rates, you can actually qualify for more by swapping lenders and finding someone who has a lower rate. Okay. So please keep that in mind. Now I see this problem only getting worse because we have a housing supply issue in most markets in Canada.

Scott Dillingham: 07:44

I know the government is trying to do things to prevent that. This week they actually introduced the it was 15% foreign buyer tax in the, greater Horseshoe area around Toronto. And now that's been increased to 20% tax, but it's for all of Ontario. And I do predict that the other provinces will follow. I don't know when, and I could be wrong.

Scott Dillingham: 08:09

I just believe that if they're doing it here, they're gonna do it in other provinces. Just like the COVID mandates. Right? Once they came out everywhere, when they removed them, gradually, it started removing in different provinces. So it's I I believe the same thing's gonna happen.

Scott Dillingham: 08:22

You're gonna have that, formed by your tax everywhere. Again, I could be wrong. That is my prediction. So with that being said, that is gonna help the housing supply a little bit, but we still have issues and they're talking about other things to reduce these housing supply issues. Now I have to take a quick pause, but when I come back, I'm gonna continue and go into what all of this means and some tricks to help you to maximize your purchasing power while getting the best rates.

Scott Dillingham: 08:54

Welcome back. Okay. So before the break, I discussed how the lenders, depending on what product you get and what rate you get, if your rate is 3.25 or higher, potentially your purchasing power is being eroded. Right? Because the stress test will increase.

Scott Dillingham: 09:15

So we do have some tricks into that, for you. So one of the things that I'm suggesting to all of my buyers, which is within the right, they have the capacity to do this with their mortgage. If they are looking to buy the biggest style home that their income supports today. Now, please keep in mind, these podcasts are informational and, education based. And I do ask that you consult with a professional before pulling this advice.

Scott Dillingham: 09:46

Now, obviously I am a professional, but I'm giving broad advice over the air where if you are working with us directly, it will be custom tailored to you. So please take everything I'm about to say here with a grain of salt, but it is perfectly bowable and it's something you can do. And there could be consequences for you down the road if you get too aggressive with this. So I just want you to be careful. But what I have been suggesting to the correct buyer of mine is to actually get the variable rate mortgage because the variable rate mortgage is because it's so much lower, they can qualify for the full amount.

Scott Dillingham: 10:25

They're not being scaled back on the stress test. And then once you take possession of the home, right? So the closing date comes, it's yours. You get the keys, you move in, life goes on. Once that happens, you can call up the lender that you're working with.

Scott Dillingham: 10:41

Most lenders will allow you to lock it in to a fixed rate, no charge. Okay? And there's no mortgage penalties because it's part of their terms and conditions. And again, you wanna make sure that you are discovering these terms and conditions of doing this. And the other thing is too, is if you're buying at the absolute max of your whole, like, budget and you're doing this trick, just know it could make it tougher for you down the road because if the interest rates do go up, your payments can go up.

Scott Dillingham: 11:11

Right? So you don't wanna get in trouble. That's why we have the stress test. So anytime when you're pushing back against that to maximize your purchase price, it could put you in financial strength. So you wanna be careful with this as well.

Scott Dillingham: 11:25

But by locking in and doing it this way, it's perfectly allowable, but it enables you to potentially get that bigger house today. Now, if you don't need to do this strategy, don't. But for those scenarios where there's that bidding war and this, you just need that little bit of extra to make sure you win the property over somebody else. This is a very good strategy to do it. When we do our preapprovals now, before we would just say you're preapproved at this amount and the client was good to go.

Scott Dillingham: 11:58

Now we have to say, if you go with variable, this is your preapproval. And if you go with fixed, here's your preapproval. So I also suggest to you, if you have a preapproval that's out there right now and you've already spoken to the lender, I would find out your preapproval amount with both options because you do not want to get your preapproval. And let's say the rate expires. Like, it's a crazy market, but you were told you could buy a home for 500, but the market's been crazy, so you can't actually find that home.

Scott Dillingham: 12:30

Okay? And then what happens is your rate hold. That's what the preapproval does. It approves you depending on the lender. Some lenders just lock in the rate.

Scott Dillingham: 12:39

We like to make sure you're fully approved. Okay. So there is 2 different types of preapprovals there. But the preapprovals meant the ones we do, it's meant to approve you, but it also locks in your rate. If that rate expires, just know your preapproval amount might shrink.

Scott Dillingham: 12:56

So I do encourage you to speak to your lender and find out if if you've passed that 90 or a 120 days, whatever the lender's at, and you haven't found a home, I highly recommend that you find out if it alters your preapproval. Because in most case or where the rates are now, you could be having a smaller preapproval. In this market, I'm hearing from a lot of realtors that say they're telling their clients to, if you want this home, you can't have conditions in your offer. It's a very common thing that I'm hearing, and the client obviously signs off on that. But that's why it's super important to have your preapproval done.

Scott Dillingham: 13:37

Because if you're gonna make that type of a risky decision, you need to know for sure that you're approved. So it's super important that you confirm with your lender what your pre approval is if the rate hold expires. Cause again, you do not wanna get into trouble. You don't wanna have that 500 figure and then the rates go up and now it's 470, but you've went in firm, which means no conditions on a property, but your purchasing power shrank. You gotta be very careful, but with a variable rate as of today, it has that lower stress test rate.

Scott Dillingham: 14:12

Because if the rate is 1.5% and you either qualify at 2% above that, or the stress test rate at 5.25, whatever's higher, of course, the variable's gonna give you that full space. If again, you're qualifying and your rate is 3.25 or higher, then that's when your purchasing power can disappear. So you have to be very careful. Being that, I'm recording this. It's the end of March.

Scott Dillingham: 14:39

Something else comes into play here. In spring and summer, that's when the lenders come out with their best specials and their best promotions. So if you haven't been preapproved, I would actually do it now because I think this will be the best time to get the lowest interest rates of the whole year. So even if the Bank of Canada does raise the rates, you also have the lenders coming out with special promotions. So as a buyer in this market, you may not feel or notice the rate increases now.

Scott Dillingham: 15:14

But if you wait to fall comes, you will. Right. Cause that will shrink your purchasing power. And I I'm not an economist and I, I don't have all the stats, but my prediction for the market is that we still have a housing demand issue. So I don't see it crashing.

Scott Dillingham: 15:36

Maybe it'll slow for a bit when the rates pick up. But every time I've ever done mortgages and the rates go up, there's like a delay, like a lag where people are like, woah, the rates just went up and they wait. And then quickly that delay goes away. And obviously in the cases where the rates drop, then the buyers flood the market and they get out there because they're like, oh yeah, the rates drop. Let's move in right away and get this going.

Scott Dillingham: 16:01

So I do think that if you are serious about buying, now is the time. So get out there, meet with your realtor. If you're looking for a realtor recommendation and you don't have one that your trust reach out to us, even if you're not going to use us for the lender, we can recommend you to people. We have clients all over Canada that we work with. So depending on the market and where you're hearing this from, if you're looking for somebody good, we can potentially make a recommendation for you in your market.

Scott Dillingham: 16:34

But again, I think it's super important to do your preapprovals. And if you've already done one, double check with your lender when it expires. And if it has recently expired, I would do it again. And I would see if your purchasing power shrinks. And if it does, then you might want to change lenders.

Scott Dillingham: 16:54

Because as mentioned, we have some other lenders who are in the twos still for the fixed rates. So those lenders, there will not be any impact as of today. Right? And or erosion to the purchasing power. But once the rates creep above 3.25, there will be.

Scott Dillingham: 17:12

So if you're somebody that has to get the fixed under, that's it, there's no questions about it. You're getting fixed. Then you have to be very careful of the lender that you work with. So you don't get stuck with a smaller house. So I hope all of this helps.

Scott Dillingham: 17:26

If you have any questions or want to get in touch, feel free to call my office directly at 519-960-0370. I have a large team to help and support you and answer your calls and your questions. I'm really looking forward to chatting with you and we'll talk soon.