Mortgage stress test change

Effective April 6, 2020, we will be using a slightly different number to qualify borrowers who are purchasing or refinancing a home. The federal government is changing the figure used to stress test mortgage borrowers.

If you aren’t clear what we mean by stress test, here is the background. 

October 2016 the government implemented the stress test for people buying homes with less than 20 per cent down. People have different theories as to why the test was introduced. The apparent intent was to ensure that Canadians didn’t overextend themselves financially by buying too much house. 

What followed was a slow down in the real estate market as people's borrowing power was reduced by roughly 20 per cent.

Prior to the roll out of the stress test, when determining how much people qualified to borrow we used the contract rate of the mortgage. The contract rate is the actual rate being offered to borrowers.

Since the introduction of the stress test, clients who put down less than 20 per cent need to qualify based on the benchmark rate (Bank of Canada published rate, which is currently 5.19 per cent). 

In January 2018, the government added a stress test for clients who put down more than 20 per cent. They must qualify based on either the benchmark rate or their contract rate plus two per cent, whichever is higher.

Starting April 6, we will be using a median interest rate plus two per cent for qualification purposes.

What is the median interest rate?

The articles I’ve read indicate that once a week the median interest rate will be set or adjusted to better reflect the interest rates currently available to mortgage clients.

One example I saw showed the median interest rate set at 2.89 per cent. In this case, clients will have to qualify at 4.89 per cent instead of the Bank of Canada Benchmark rate, which is currently 5.19 per cent.

At the same time I see several lenders have rates available around 2.69 per cent … so while the new stress test is a step in the right direction it will be interesting to see what it looks like when the rubber hits the road.

How big of a deal is this?

Doing some number crunching on a few of my clients’ files, I see an increase in the amount they can borrow of about three per cent. Will that make a significant difference? For some families it absolutely will.

What is more important is that this is the first decrease to the stress test since it was introduced. Linking the stress test to a median interest rate will (in theory) mean a more responsive evaluation based on rates that are currently available.

I am off to a Mortgage Professionals Canada conference in Toronto this week and am looking forward to learning more about how this will affect my clients.

The evening of March 10, we are hosting a Home Buyers Seminar. We will be covering the basics of qualifying for a mortgage and going through what to expect throughout the process of buying a home. Brian Stephenson of Pushor Mitchell will be joining us to explain the legal end of a home purchase. 

Whether you are a first-time buyer or have bought homes in the past, you are welcome to join us. We are keeping the group small so that people are comfortable asking questions. For more details and if you would like to attend please email me at [email protected] to reserve your seat. 

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.