With an announcement from the government that changes are coming to the mortgage stress test in April, prospective home owners are likely asking, what does this mean for me?
Today, federal Finance Minister Bill Morneau announced changes to the benchmark rate used to determine the minimum qualifying rate for insured mortgages, also known as the ‘stress test’. The Office of the Superintendent of Financial Institutions (OSFI) also announced that it is considering the same new benchmark rate for uninsured mortgages, slated to take effect April 6.
“Canadians who are getting insured and insurable mortgages can expect to qualify for a little bit more than what they can today,” said James Laird, co-founder of Ratehub Inc., which owns financial comparison website Ratehub.ca and mortgage brokerage CanWise Financial.
The stress test is used to ensure that home owners can afford their mortgage payments if interest rates rise in the future. But it has been criticized as being too high and based only on the big banks’ posted rates, compared to the actual mortgage rates offered by a variety of lenders.
Currently, the benchmark for the test is published by the Bank of Canada, based off of the posted five-year conventional mortgage rates that are offered by the country’s biggest banks. The new benchmark for the tests will be a weekly, five-year rate calculated by the Bank of Canada and based on mortgage insurance applications based on actual rates a variety of lenders are offering home buyers, plus another two percentage points.
“Put simply, Canadians will be stress tested at a rate that is about 2% higher than the mortgage rate they are receiving,” said Laird, adding, “The old system … meant that the stress test rate did not change in correlation with underlying mortgage rates.”
“Our expectation is that the stress test will drop to about 4.89% once the change takes effect on April 6, assuming current market rates,” Laird said. He encouraged home buyers “who cannot currently qualify for what they want, but are close, to redo their qualifying calculations using the new stress test.”
According to Ratehub’s mortgage affordability calculator, a family with an annual income of $100,000 with a 10% down payment and 5-year fixed mortgage rate of 2.89% amortized over 25 years would have qualified for a home valued at $511,424 under today’s 5.19% qualifying rate. Under the new stress test rate of 4.89% (their mortgage rate plus 2%), they could afford $526,632, a difference of $15,208 (up by 3%).
As well, Laird notes, “This adjustment means that the way the stress test is calculated for both insured mortgages and uninsured mortgages will be very similar.”
When the borrower has a down payment of 20%, or more, of the sale price, insurance is not required. When a borrower has less than a 20% down payment, lenders are required to get government-backed mortgage insurance.