A little less stress in the test…

The federal government has announced its response to the rising chorus that has been calling for changes to the mortgage stress test.

Starting in April the qualifying rate for the stress test on insured mortgages (those with less than 20% down payment) will be based on the weekly median 5-year fixed insured mortgage rate, plus 2%. At the time of the announcement that would have been 4.89% (plus 2%). That is 30 basis points lower than the currently qualifying rate of 5.19% (plus 2%) which is based on the posted 5-year fixed mortgage rates at the Big Six banks.

Actual contract rates have been falling for some time so the stress test rate has been moving further and further out of sync with real mortgage costs. Using the new formula will allow the stress test to move as the market moves.

The federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), says it is considering the same benchmark rate for its stress test on uninsured mortgages (those with more than 20% down).

As of right now, the new formula will decrease the income requirement on a $300,000 mortgage by about $1,500. Most market watchers see it as being most helpful to buyers who are right on the cusp of being able to pass the stress test.

Alternatively, it will allow those who can easily pass the stress test to purchase about 3-5% more home.

These changes will come into effect on April 6, 2020.

The new benchmark rate will be published on a Wednesday and come into effect the following Monday.

The new Benchmark Rate for insured mortgages will be published weekly on the Bank of Canada’s website, and will be based on submitted mortgage insurance application contract rates. If, on any given week, there are any delays in updating the new Benchmark Rate, the previous week’s published Rate will stand until a new Rate is published.

Reference: First National Financial LP / Mortgage Broker News