Mortgage Stress Test Changes – What You Need To Know

Published: February 21, 2020

Stress Test Impact on BC Home SalesNew Mortgage Stress Test Rules

February 20, 2020

This coming April, the government will change the rules that cover mortgage lending. These changes should make it easier to qualify for a loan to buy a home.

As of April 6, the so-called “stress test” for mortgages will be calculated in a new way. The stress test rate used to be calculated on the 5-year posted rate (currently at 5.19%). But now the rate will be based on Canada’s median five-year fixed insured rate, plus 2% (currently at 4.89%). 

The stress test was implemented in January 2018 as a way to let some of the speculation out of the housing market at the time. A would-be borrower is tested against his or her ability to pay down the loan at a higher interest rate. If the borrower were to fail the test, a lender would not be allowed to loan them money.

According to Ratehub.ca, the average rate for a five-year fixed term mortgage is currently 2.89%. Currently, a borrower approved for that loan be subject to the stress test and be tested against the five-year posted rate of 5.19%. But under the new rules, the borrower would be tested at 4.89% — the actual mortgage rate, plus 2%.

Let’s look at it in terms of actual buying power. Today, a buyer with an annual income of $100,000 with 10% down, would qualify for a mortgage of $511,424. However, under the new rules that same buyer could now afford $526,632, an increase of more than $15,000.

What You Need To Know

So, what should you know going forward? Here are seven key things to keep in mind:

  1. Big Banks Are Not In Control – Taking away the tie to the benchmark rate and tying it to the median rate makes the playing field more equitable for purchasers.

  2. Economic Benefits Ahead – This new test will spur the housing economy during slow periods and slow growth when it gets too hot.

  3. Makes Test More Fair – The new rules will apply similarly to both insured (10% or less down) and uninsured (20% or more).

  4. Higher Home Prices – Not the best news if you are trying to buy, but with more buying power, market values could rise.

  5. More Purchasing Power – Lower rates could be in the future for the Bank of Canada rate which would increase purchase power for buyers.

  6. Timing – Spring was already shaping up to be low on inventory, now buyers could be competing for homes.

  7. Bank Rates – Banks no longer will be pressured to cut rates by the housing industry to spur buyers.

Helpful Links

Loans Canada – Website detailing mortgage information

Rate Hub – Online tool to show qualifications and buying power

Rate Spy – Online aggregation of posted mortgage rates from big banks and lenders

 

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