New Mortgage Stress Test

By: Marilyn Palmer

New Mortgage Stress Test

Tags: Toronto, GTA, Mississauga, Oakville, Burlington, Mississauga , homes, condominiums, buyers, sellers, mortgage, real estate

As most people know, Ottawa unveiled new plans to revise the current Mortgage Stress Test.  The new rules come into effect April 6, 2020.  This should, in the short term at least, make it easier to qualify for a mortgage.  

At the time the OFSI Morgage Stress Test was brought in, the benchmark for mortgage approval was at Canada's Big Banks' 5 year posted rate, which is currently at 5.19%.  

I sat down with Gregory Johnston, Mortgage Broker with Your Mortgage Connection to provide insights to the new rules and what it means for buyers.  Here is what he had to say:

"Here's a more indepth look at the implications, as well as industry reactions to the change."

"The new Stress Test rate for insured mortgages, those with less than 20% equity, if it were in effect today, would be 4.89%,  It is based on a rate equal to the weekly median 5 year fixed insured mortgage rate plus 2%."

I stated that this is a difference of 30 bases points and though it may seem small, it can add up to thousands more in purchasing power.  Gregory went on to further say:

 "A large question to be answered is, how will the rate be calculated exactly?  That is still to be determined, at least publicly.  The Bank of Canada says it can't confirm if the New Benchmark Rate will be based on all insured applications, such as 2-to-4 unit properties, self-employed buyers, second homes, rental properties, etc; or just a core group."

"How much of the mortgage market will be impacted by the Stress Test Rate Change?  There's no question the new formula on insured mortgages will help many buyers who are just on the cusp of being able to pass the current stress test.  If you consider the current rate of 5.19% is a full 280+ basis points higher than the current lowest available insured mortgage rate on the market, the new formula will narrow the gap by 30 basis points.  If insured mortgage rates remain low the gap between the current 5.19%  and the New Stress Test will widen in the future in the borrower's favour as the weekly median average rate decreases thus helping more buyers qualify for a larger mortgage.

"While it might boost buying power by just 5%, or less, depending on what the new benchmark turns out to be, the psychological boost will be material.  The new Stress Test for insured mortgages, and if extended to uninsured mortgages (those who have more than 20% equity) could put further upward pressure on home prices especially in markets that are already leaning to a seller's market.  Home buyers, particularly younger buyers, are worried about prices running away from them."

"An easier Stress Test at 4.89% is better than one at 5.19%, but it might hurt current buyers rather than help!! Time will tell!!"

To me, home prices are subject to supply vs demand.  As said in my last blog, if the forecast for 2020 remains that demand will outpace supply then the average selling price in most areas are bound to increase.

As April approaches I hope to have further information on whether uninsured mortgages will be part of the new Stress Test and any other updates as I receive them.  Thank you Gregory for all your help and insight!

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