Canada's Mortgage Stress Test Updated
The government of Canada today announced changes to the “stress test” rate for insured mortgages.
Effective April 6, the new minimum rate a mortgage seeking customer has to pay to qualify for an insured mortgage will now be set at the weekly median five-year fixed insured mortgage rate from insurance applications, plus 2%.
The stress test was first put in place in Jan of 2018 to let some of the speculation out of the housing market. It did so by making sure that borrowers would be able to pay down their debts even if rates moved higher. A would-be borrower is tested against his or her ability to pay down the loan at a higher interest rate, and if the borrower fails the test, a lender isn't allowed to loan them money.
A recent review of the program by the Office of the Superintendent of Financial Institutions (OSFI) conducted in January concluded that the minimum qualifying rate should better reflect changes in the current housing market. In its review the OSFI stated that the Bank of Canada’s five-year rates are no longer moving in line with actual contract rates from big banks.
They also concluded that the gap has widened to exceed two per cent on a sustained basis, suggesting a less responsive floor than originally intended. For now, the change applies only to insured mortgages. but it is also considering similar changes for uninsured mortgages.
These new changes will strengthen purchasing power by approximately 3-4%. It’s not a huge change but it will help purchasers whose ratios were just over the non-qualifying line, who will now be able to have their numbers run again and hopefully qualify this time around.
Although these changes are not drastic, it is a sign of a trend which shows much more flexibility for those seeking mortgages, especially those buying their first home or those with minimal down payments who must have mortgage insurance also in place.