Have you heard about the changes proposed for the mortgage stress test?
The big date is close – April 6 th , 2020!
What is this change exactly? How would it benefit me?
Find the answers to all your questions in our FAQ.
Big news shook the mortgage world last week. The federal government announced that it would be easing the stress test for insured mortgages. Some experts believe that it would loosen the barrier to enter Canada’s housing markets and could be a breath of fresh air for
some prospective buyers.
The change will take effect quite soon – on April 6, 2020. The threshold (the minimum rate) will be slightly decreased while the amount a future owner can borrow will be slightly increased. So what is this new policy all about? We compiled the answers to some frequently asked questions, so you could navigate the changes better.
- How is this new rate calculated?
Right now, the minimum qualifying rate is currently the greater of the borrower’s contract rate or the Bank of Canada’s five-year benchmark mortgage rate (which in turn is based on the Big Six banks’ posted mortgage rates).
Once the change is implemented, the test will be based on the contract rates on all insured mortgages. Thus, the new minimum qualifying rate will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.
2. How will this change impact the mortgage market?
This change will only affect insured mortgages, which account for about one third of all new mortgages. The Office of Financial Institutions (OFSI) hinted that they may consider making a similar change in the realm of uninsured mortgages, but that is currently under a review)
3. How would an average home buyer benefit from the change?
Some experts believe that the benefit would be marginal. If someone is buying a home at the absolute margin of passing the stress test, the new rules would help them to qualify. Alternatively, it would allow clients who easily pass the stress test to take on a slightly bigger mortgage – by about 5%.
The difference between the old rate and the contract rate, plus 200 basis points, is currently about 30 basis points. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization. That translates into a fairly small increase in purchasing power for the average borrower, likely around $20,000, $25,000 on an average mortgage.
But hey, a stress test at 4.89% is better than one at 5.19%!
4. Would this change affect housing prices and make it easier on the Canadian home buyers?
Experts believe that it’s the lack of supply in the hottest Canadian markets that is driving the prices up. There are far more people than there are housing products available. So the change in the stress test policy in isolation would not make housing much more affordable. However, this increase in purchasing power may have further effect on home-buyers, even a psychological boost on the younger buyers may be significant. Overall, what really needs to be addressed is the lack of supply in major urban markets.
If you are a prospective home buyer and are wondering when is the best time to step into the housing market, do not hesitate to call us.
We at Home and Mortgage Advice have been helping clients achieve their financial goals for over 10 years.
Whatever it is that you need – professional advice, a competitive rate or a referral – we have the answers. Contact us today at 877-296-2696 or email us info@homemortgageadvice.ca