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: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 going to be paying on. That's what your monthly payments are based on. Everything is based on this 3%.
Scott Dillingham:Okay. But what the stress test 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, reason for this is because the government has decided that if interest rates go up, they want to still make sure that you can make your mortgage payments.
Scott Dillingham:Because the last thing that they want to 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.
Scott Dillingham:Okay. So that's really what the stress test is. However, in our market rate 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 the last thing you want to 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 going to share with you to make sure you're still maximizing your purchasing power while protecting yourself and getting the best rates while doing so.
Scott Dillingham:Pretty much when COVID came out, the bank of Canada lowered the rates by one and a half percent was the total rate. 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: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: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 one point two five percent increase. Now there's different things going on. So this may or may not happen.
Scott Dillingham: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 going to raise the rates when the economy is struggling. But because it does look like it's mostly behind us, they're going to start doing it, but it's very careful. They do it stage step by step. It's not just overnight that they raised the rates.
Scott Dillingham:Oh, 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 by the government transacting in this way.
Scott Dillingham: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:So for an example, let's say your rate is three and a half percent. That is where some major banks are right now on a five year fixed is in the three and a half range. If you get a rate of three and a half, that means your stress test is five and a 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 want to 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: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 going to happen. 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: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 process today and why I'd still get the variables, even if it does go up, right? Say they do raise it a quarter, one and 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. So right now we've got a lender who's at one and a half percent for the variable.
Scott Dillingham:Just as an example, this is at the end of the March 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 three and a half percent. Some even higher, like other lenders are even higher than that. So potentially the variable rate is still actually cheaper. Even if it does go up one and a quarter percent, not in all cases again.
Scott Dillingham: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 three and a quarter to 3.64. 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 rates. Okay.
Scott Dillingham: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. 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.
Scott Dillingham:And I do predict that the other provinces will follow. I don't know when, and I could be wrong. I just believe that if they're doing it here, they're going to 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.
Scott Dillingham:So it's, I believe the same thing's going to happen. You're going to have that foreign buyer tax everywhere. Again, I could be wrong. That is my prediction. So with that being said, that is going to 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.
Scott Dillingham:Now I have to take a quick pause, but when I come back, I'm going to 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. 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?
Scott Dillingham:Because the stress test will increase. 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.
Scott Dillingham:And I do ask that you consult with a professional before pulling this advice. 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 allowable 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.
Scott Dillingham:They can qualify for the full amount. They're not being scaled back on the stress tests. 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.
Scott Dillingham:Life goes on. Once that happens, you can call up the lender that you're working with. Most lenders will allow you to lock it in to a fixed rate. No charge. Okay.
Scott Dillingham:And there's no mortgage penalties because it's part of their terms and conditions. And again, you want to 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 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. Right.
Scott Dillingham:So you don't want to get in trouble. That's why we have the stress tests. So anytime when you're pushing back against that to maximize your purchase price, it could put you in financial strain. So you want to be careful with this as well, 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 in this, you just need that little bit of extra to make sure you win the property over somebody else.
Scott Dillingham:This is a very good strategy to do it. When we do our pre approvals now before we would just say you're pre approved at this amount and the client was good to go. Now we have to say, if you go with variable, this is your pre approval. And if you go with fixed, here's your pre approval. So I also suggest to you, if you have a pre approval 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.
Scott Dillingham: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. Okay. And then what happens is your rate hold. That's what the preapproval does.
Scott Dillingham:It approves you depending on the lender. Some lenders just lock in the rate. We like to make sure you're fully approved. Okay. So there's two different types of pre approvals there, but the pre approvals meant the ones we do.
Scott Dillingham:It's meant to approve you, but it also locks in your rates. If that rate expires, just know your preapproval amount might shrink. So I do encourage you to speak to your lender and find out if you've passed that ninety or one hundred and twenty days, whatever the lenders at, and you haven't found a home, I highly recommend that you find out if it alters your preapproval because in most cases 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. That's a very common thing that I'm hearing.
Scott Dillingham:And the client obviously signs off on that, but that's why it's super important to have your preapproval done. Because if you're going to 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 preapproval is. If the rate hold expires, because again, you do not want to get into trouble. You don't want to have that 500 figure and then the rates go up and now it's $4.70, but you've went in firm, which means no conditions on a property, but you're purchasing power shrink.
Scott Dillingham:You gotta be very careful, but with a variable rate as of today, it has that lower stress test rate. Cause 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 is going to 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.
Scott Dillingham:It's the March. 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 pre approved, 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.
Scott Dillingham: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, 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 don't have all the stats, but my prediction for the market is that we still have a housing demand issue.
Scott Dillingham:So I don't see it crashing. 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 and the buyers flood the market and they get out there. Cause they're like, oh yeah, the rates drop.
Scott Dillingham:Let's move in right away and get this going. 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.
Scott Dillingham: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. But again, I think it's super important to do your pre approvals. 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 you're purchasing power shrinks.
Scott Dillingham:And if it does, then you might want to change lenders. 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? Or erosion to the purchasing power. But once the rates creep above 3.25, there will be.
Scott Dillingham: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: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.