A few years ago, the stress test was introduced as a safeguard against rising interest rates, to make sure homebuyers would still be able to make their mortgage payments if their rate increased down the road. To qualify for a mortgage, buyers need to qualify at the greater of 2% higher than their actual rate, or the Bank of Canada’s benchmark 5-year rate, which today is 5.19%.
Earlier this month, Minister of Finance Bill Morneau announced changes to the benchmark rate used to determine the qualifying rate for insured mortgages – mortgages with less than 20% down payment. This change will come into effect on April 6, 2020.
There has been a mixed response from the financial community about the effectiveness of this change. For some, the new qualifying rate will make it more affordable; for others, it won’t make much of a difference, especially in hot-market areas, where prices are rising quickly.
There has been pushback from some economists and housing experts who say that the new stress test will just further fuel the housing market.
Here’s what we do know:
1. Currently, the stress test for insured mortgages is 2% above contract rate or the benchmark rate, whichever is greater.
2. The new stress test, if it was in place today, would be approximately 4.89%, which is about 30 basis points below the current benchmark rate.
3. The Big Banks posted rates will no longer directly establish the benchmark rate.
4. Borrower’s will have slightly more purchasing power
Here’s what we don’t know:
1. We are still waiting for clarity on how the stress test on conventional (those with more than 20% down payments) mortgages will be determined.
2. If it will affect home prices.
The new benchmark calculation, as stated, is more market-driven. If interest rates continue to fall, then, in many cases, buying power would also increase. Some economists are predicting rate cuts later this year, which could drop the median rate for the stress test even further.
The one truism is that every homebuyer has a unique situation. The stress test notwithstanding, each mortgage has to be tailored to each homebuyer. This will ensure that the mortgage is meeting their needs and helping achieve their financial goals.
I’d love to discuss these new developments, so call me today and let’s talk.