New mortgage stress-test rules will boost buying power

This spring, new qualifying mortgage rules are being put in place to help Canadians boost their home-buying power.

Finance Minister Bill Morneau announced that beginning on April 6, 2020, the benchmark rate used to determine the minimum qualifying rate for insured mortgages, also known as the stress test, will be calculated based using the weekly median five-year fixed insured mortgage rate from mortgage insurance applications plus two per cent.

Changes to affordability

Under current rules, a family with an annual income of $100,000 with a 10 per cent down payment and a five-year fixed mortgage rate of 2.89 per cent amortized over 25 years qualifies for a home valued at $511,424 under the 5.19 per cent qualifying rate, according to calculations using Ratehub.ca's mortgage affordability calculator,

Under the new stress-test rate of 4.89 per cent, they can now afford a home worth $526,632, a difference of three per cent or $15,208 in this scenario.

“As a result of Morneau’s review of the stress test he has announced a change to the rate that will be used to stress test insured and insurable mortgages," says James Laird, co-founder of Ratehub.ca and president of CanWise Financial in a press release. "When the change takes place April 6th, the stress test rate will be set at the average five-year fixed rate for mortgages applying for default insurance on applications received by CMHC in the past week. Prior to the change, the stress test rate was set at the average of the big bank’s five-year fixed posted rate. The old system gave the big banks too much control over mortgage qualifying and meant that the stress test rate did not change in correlation with underlying mortgage rates."

The government's announcement said that this change was a result of a review by federal financial agencies. It concluded the minimum qualifying rate "should be more dynamic to better reflect the evolution of market conditions."

The department of finance press release said that overall mortgage standards are "working to ensure that homebuyers 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 it stated.

Every little bit helps

“For many middle class Canadians, their home is the most important investment they will make in their lifetime. Our government has a responsibility to ensure that investment is protected and to support a stable housing market," said Morneau. "The government will continue to monitor the housing market and make changes as appropriate. Reviewing the stress test ensures it is responsive to market conditions.”

Laird expects that the stress test will drop to about 4.89 per cent once the change takes effect, assuming current market rates. "Canadians who are getting insured and insurable mortgages can expect to qualify for a little bit more than what they can today," he said.