Ever since Prime Minister Justin Trudeau asked Finance Minister Bill Morneau to review the mortgage stress test in December, there’s been speculation that the mortgage stress test rules would be changing. Now it’s finally been made official.
As of April 6, 2020, the Department of Finance announced the mortgage stress test will be calculated in a new way for insured borrowers (if you’re putting less than 20 percent down on a home you’re buying). Currently it’ s based on the five-year posted rates at Canada’s big banks. But under the new rules, it will be calculated based on the "the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two per cent.
Why did the government change the mortgage stress test rules? It was because it wanted to make the stress test “more dynamic to market conditions.”
"This will ensure that people only take on mortgages that are appropriate for the situation, but it does mean the changes in the stress test will be there if the average … rates provided by the banks actually goes down or up," said Finance Minister Bill Morneau. "It will actually adjust appropriately to dynamic market conditions."
The biggest issue with the previous stress test is that it was based on the posted rates of the big banks. While mortgage rates have come down in recent months, the big banks have been slow to reduce their posted rates. The posted rate at most of the big banks is still above five percent right now.
This is largely due to the fact that the banks calculate mortgage penalties based on the posted rate. If the big banks were to lower their posted rates, borrowers would pay a lower penalty when breaking their mortgage.
The old stress test rules also didn’t sit well with non-bank lenders who said that it gave the big banks even more control over the mortgage market. The new mortgage stress test rules solve this by taking the big banks out of the equation.
If the mortgage stress test were calculated on the day the new rules were announced, February 18, 2020, using the new rules, the new benchmark rate would be 4.89 percent. That’s 30 basis points lower than today’s stress test rate of 5.19 percent.
The new stress test means increased purchasing power for those putting down less than 20 percent on a home. Although 30 basis points may not seem like a lot, it could add up to thousands more in home buying power.
There’s also the psychological boost. The introduction of the mortgage stress test caused some first-time homebuyers to sit on the sidelines and delay their home purchase. With the stress test loosening, it could be an opportune time to get back into the real estate market.
While the stress test rule changes are certainly welcomed, they only apply for insured mortgages (when a homebuyer is putting down less than 20 percent on a property). If you’re an uninsured borrower, you’re making at least a 20 percent down payment; you’re still required to qualify at the benchmark rate of 5.19 percent. However, there’s some good news on that front as well.
The Office of the Superintendent of Financial Institutions (OSFI) has hinted that it may also tweak mortgage rules for uninsured mortgages. OFSI’s reasoning is that it wants to maintain a “cohesion between the benchmarks used to qualify both uninsured and insured mortgages.”
While it’s not official yet, this rule change looks likely. We’ll let you know if and when it becomes official.
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