Mortgage Stress Test Changes – What You Need To KnowPublished: February 21, 2020
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:
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.
Economic Benefits Ahead – This new test will spur the housing economy during slow periods and slow growth when it gets too hot.
Makes Test More Fair – The new rules will apply similarly to both insured (10% or less down) and uninsured (20% or more).
Higher Home Prices – Not the best news if you are trying to buy, but with more buying power, market values could rise.
More Purchasing Power – Lower rates could be in the future for the Bank of Canada rate which would increase purchase power for buyers.
Timing – Spring was already shaping up to be low on inventory, now buyers could be competing for homes.
- Bank Rates – Banks no longer will be pressured to cut rates by the housing industry to spur buyers.
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