What was the announcement?
The federal government announced on Tuesday that we will see mortgage stress test changes starting on April 6, 2020. The mortgage stress test was introduced in January 2018. This was designed to make the mortgage approval process more rigorous for insured mortgages. Ensuring that homeowners can afford the mortgage on their property. This was designed to prevent would-be borrowers from taking on more debt than they can reasonably cover. This stress test rate follows a reduction in July 2019 where the rate was reduced to 5.19%. This rate was designed to be the floor. You would need to qualify at 5.19% or the bank rate + 2%, whichever is higher. Even though we haven’t seen any changes in the overnight rate, mortgage rates have seen all-time-lows in the last 24 months.
The new stress test rate is designed to be more in line with actual market conditions. The mortgage stress test will adjust based on the current market conditions. This may be partially in response to the growth in the private mortgage space in Canada. The new rate is calculated as “the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two percent.” as noted during the press release from Minister Morneau.
What do these changes mean?
This means the stress test rate will be more in line with the current market rates than before. When the 5-year fixed insured mortgage rates are lower, the qualification rate will be in line with these changes. Based on the current market rates the qualifying rate would equal 4.89%. This is 30 basis points less than the current qualifying rate. There are discussions that we may see changes to the stress test for uninsured mortgages as well.
What does this mean for consumers?
For an applicant that is looking to be approved for an insured mortgage with a bank rate of up to 2.89%, they would have to qualify at the market qualifying rate of 4.89%. This may not seem like a significant difference from the previous rate but it can have an impact on the mortgage amount you qualify for. For example, if $250,000 was the max you qualified for on the previous stress test rate of 5.19%, you could now qualify for up to $257,500 with the new stress test.
While $7,500 may not seem like much, it will allow more first time home buyers to enter the market. The impact will help in Atlantic Canada, where we are seeing strong growth in real estate prices. This should help to respond more favourably to changing market conditions. This may reduce the size of the downpayment needed to purchase a home, though you will still need to come up with 5% of the purchase price to qualify for mortgage insurance.
If you’re looking for more information about how this can impact you and your mortgage get in touch with our professionals at Centum Home Lenders. We can help you navigate these changes and help find you a product that fits your financial goals! Give us a call at 506-854-6847, or get in touch with us here!