What Changes to the Minimum Mortgage Stress Test Rate Means to Potential Homebuyers
Getting a mortgage in Canada is about to get a little bit easier when the Department of Finance’s criteria for mortgage approval (the mortgage stress test) changes in April. This is good news for people getting into the housing market or renegotiating mortgages. Stay with me here for an explanation, but first, some background.
Before 2018, when you applied for a fixed mortgage, your likelihood of being approved depended on what you could realistically afford at that snapshot in time. That meant assessing your ability to meet the financial obligation of the mortgage at the interest rate offered to you at that time. Neither lenders nor homeowners looked past the future of the offered term to estimate whether that mortgage would be affordable in the future, should interest rates rise.
What is the Mortage Stress Test?
With interest rates certain to fluctuate, the ‘stress test’ was implemented to try and better protect homeowners from getting themselves into situations where future higher rates would make their mortgage unaffordable, effectively pricing them out of their houses and default. The stress test rate (or qualifying rate) is the minimum interest rate that lenders must use to qualify you for a mortgage. If you are deemed able to handle your mortgage payments at the stress test rate or higher, then you are more likely to be approved.
When first put in place, the stress test took a lot of people, especially younger, first-time buyers out of the housing market. But it was helpful in reducing the risk of people losing their homes because they could no longer afford their mortgage payments at higher rates. It’s the method used to set the qualifying rate used in the stress test that is changing on April 6.
Ultimately, Good News for Homebuyers
Without going into the nitty-gritty of how the stress test rate was and will be set, suffice to say that the rate is expected to decrease with the new method. Previously it was based on an average of the 5-year mortgage rates published by the Big 6 banks. But the general consensus is that published rates are not a realistic measure since the financial institutions rarely offer their published rates, keeping the stress test artificially high. Beginning April 6th, 2020, the minimum stress test rate will be based on the rates reported in ACTUAL mortgage applications in Canada, making it less arbitrary and more in tune with the market. The minimum stress test rate will be set weekly and posted on the Bank of Canada website. The bottom line is that with a lower rate, more people will pass the stress test and qualify for mortgages. Good right?
It is good, especially for younger people who may not have qualified before. There could be a downside though, in that with an increase in the number of potential buyers comes an increase in housing prices. But according to the Department of Finance news release, one of the reasons for the change is to help stabilize housing prices from continued high growth. So what now?
As it turns out, the new method also allows the Minister of Finance some flexibility in adjusting the minimum stress test rate by adding a buffer to the calculated average rate. Increasing or decreasing the buffer changes the stringency of the stress test when it is deemed necessary to put the brakes on a hot market or to stimulate a cooling one.
Ultimately, the new method of determining the stress test minimum rate is going to allow more people who may not have qualified under the old test, to buy the home they want which is a positive change. So far, the changes coming in April only apply to insured mortgages, where the down payment is less than 20% of the value of the home. However, consultations are ongoing to also rework how the stress test is calculated for uninsured mortgages.
Need a Mortgage Broker?
Contact HW Advantage mortgage broker in Burlington, Oakville, and Hamilton to further unpack how the changes to Canada’s mortgage stress test affect you. We can help find the best mortgage rates and the perfect mortgage product for you. If you are applying for a mortgage for the first time, re-applying or looking for a second mortgage we can help. Call HW Advantage at 905-541-6961, schedule an appointment on our website or fill out the form below to get in touch.