Mortgage stress test changes coming April 6, 2020

You may have heard that the federal government recently announced changes to the mortgage stress test parameters – a mortgage qualifier test that changes the amount of mortgage you can be approved for or in other words, the price of a home you can afford.

A quick history lesson

In October 2016, the federal government introduced the mortgage stress test for the first time. The goal was to protect risk in an overheated market and ensure buyers could still afford their homes if interest rates were increased. Back in 2008, many people were caught purchasing their home with little equity, with no room to increase payments once interest rates started rising, although this was more prevalent in the States than here in Canada. Borrowers with less than a 20 per cent down payment would have to qualify at the Bank of Canada’s five-year benchmark rate or their contractual mortgage rate plus an additional two per cent (whichever was higher). In 2018 it was expanded across all mortgages including those uninsured mortgages with more than a 20 per cent down payment. Again, it was added to help cool the market and potentially diminish speculators in the market.

New stress test

Earlier this year, the government announced it would adjust the mortgage stress test to better reflect dynamic market changes. Now the stress test will be based on a weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two per cent. The intent of the stress test is still intact in that it is meant to ensure you can still make your payments if interest rates were to rise. However, as the market changes, it will better reflect the actual mortgage rates offered in the market and be updated more frequently.

What does this mean?

The truth? Not a lot. The change roughly equates to about 30 basis points or perhaps about three per cent more purchasing power. It’s helpful, but if you have been searching for a home recently, you’ll realize it does not drastically change your budget. In fact, several top executives at the major banking institutes have all suggested that this will not have a big impact on the market and certainly not in areas like Toronto or Vancouver, where benchmark prices are high. The president and CEO of Scotiabank went further to suggest that rather than continue looking at the demand side of the equation, we need to be looking at the supply side as well if we want to see our markets balanced.

Reach out to your preferred mortgage broker or bank to understand how these changes, which will come into effect April 6, 2020, may affect you.