Last week, the federal government announced some upcoming changes to the way it calculates qualifying interest rates when implementing the mortgage stress test.
These change will take effect on April 6, 2020.
Before the change, the stress test is based on the interest rates posted by the 6 major banks (more specifically, the government looks at the Big 6 Banks’ posted 5-year fixed rates and then adds 2% on top of that number).
After the change, the test will be based on the interest rates posted by the mortgage industry (more specifically, the government will look at the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, and then add 2% on top of that number).
Essentially, the change will make sure the stress test is dictated by what’s actually happening in the market, as opposed to what the banks dictate. And the stress test will be more dynamic, since it'll be based on the weekly numbers.
The Government of Canada’s press release from February 18th states, “This follows a recent review by federal financial agencies which concluded that the minimum qualifying rate should be more dynamic to better reflect the evolution of market conditions. Overall, the review concluded that mortgage standards are working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses. This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions."
While the change so far applies to insured mortgages, it’s expected to apply to uninsured mortgages as well. The February press release states, "The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages. OSFI is seeking input from interested stakeholders on this proposal before March 17, 2020."
Insured Mortgages: When a borrower has less than a 20% down payment, lenders are required to obtain government-backed mortgage insurance. The mortgages must comply with the insured mortgage rules set by the Minister of Finance, including the insured minimum qualifying rate.
Uninsured Mortgages: When the borrower has a down payment of 20%, or more, of the sale price, insurance is not required. The minimum qualifying rate for uninsured mortgages is set by OSFI, the independent banking regulator.
So, what do the changes mean for the average borrower?
From what we're hearing, it’ll likely amount to a 2% - 3% increase in purchasing power.
For example, a budget of $800,000 under the current rules might increase to $815,000 - $825,000 under the new rules.
This might not sound like much, but any little bit helps in a tight market like Toronto’s.
If you have any questions just give us a shout and we’ll put you in touch with a mortgage specialist who can help.