The Mortgage Stress Test - What's changing

February 26, 2020 | Posted by: Mike Garganis

New homeowners moving in - Mortgage Stress Test

Wondering what the recent announcement by the Government of Canada regarding changes to the “stress test” actually means? 

Here’s what you need to know.  

The mortgage stress test is designed to protect banks and borrowers in the event that interest rates rise.

Currently, people getting insured mortgages must prove they can afford a payment based on the benchmark five-year posted rate. The Bank of Canada calculates this rate from typical big-bank rates, and it’s currently 5.19 per cent.

When the new benchmark rate takes effect it will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. (That would calculate out to about 4.89 per cent) A buffer of 200 basis points to be set by the Minister of Finance. (There are 100 basis points in a percentage point.)

These changes will come into effect on April 6, 2020. 

The new benchmark rate is designed to be more dynamic to better reflect the evolution of market conditions and would be published every Wednesday and take effect the following Monday. 

It will provide more purchasing power by increasing the amount of a house one can buy by around 5%. Someone who could have previously qualified for $500,000 could now qualify for about $525,000.

The Office of the Superintendent of Financial Institutions (OSFI) is also considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity). When the borrower has a down payment of 20%, or more, of the sale price, insurance is not required.

The fact of the matter is, the way the stress test was initially set didn’t respond to real-world conditions. It was arbitrary and unrealistic.  With first-time homebuyers right at the margins struggling to get into the market every little bit helps and while the new changes are a step in the right direction, more could be done.   

Have questions? Contact me today.

Mike Garganis

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