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New Mortgage Stress Test Rate

The Department of Finance created shockwaves this week with its announcement that it will be revamping how insured mortgages are stress tested.

Now that the dust has settled, here’s a more in-depth look at the implications, as well as some industry reaction.

But first, a quick recap of what’s changing come April 6, 2020:

  • Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
    • Based on the Big 6 banks’ posted 5-year fixed rates.
  • New stress test rate (if it were in effect today): ~4.89%
    • Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

How will the rate be calculated, exactly?

That’s 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 borrowers, 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?

As of 2018, insured mortgages accounted for less than a third of new mortgages. Although, the Office of the Superintendent of Financial Institutions (OSFI) announced it is also considering a similar change in its formula for stress testing uninsured mortgages (those with more than 20% equity). OSFI is currently accepting input from stakeholders by email until March 17, 2020.

How much does it help the average buyer?

There’s no question the new formula for stress testing insured mortgages will help many buyers who are currently just on the cusp of being able to pass the stress test.

Consider that the current stress test rate of 5.19% is a full 283 basis points higher than the lowest available insured mortgage rate on the market.

The new formula will narrow that gap by 30 basis points after April 6. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization.

Alternatively, it will allow those who can easily pass the stress test to purchase about 5% more home. As Ron Butler of Butler Mortgage Inc. told us, “Someone who qualified for a $500K mortgage (previously) will qualify for $525K in April.”

 

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