Five things you need to know about the new mortgage stress test rules
On April 6, new mortgage stress test rules will come into effect.
Last week, the Department of Finance announced new mortgage stress test rules that will come into force on April 6. In the short term, these new rules will lower the bar to qualify, making it easier for borrowers to get a mortgage.
A quick recap
In January 2018, the mortgage stress test was implemented to check if borrowers could afford to pay their mortgage if the interest rates increased. Federally regulated lenders would only be able to provide a mortgage to applicants who pass this mandatory test.
Still have questions about the mortgage stress test? We’ve got the answers.
What are the changes?
One of the major criticisms of the current stress test rate is that it is set arbitrarily high and does not move with the market. A review of the mortgage stress test concluded that the qualifying rate needs to be more dynamic to reflect market conditions.
At the moment, borrowers are tested against the Bank of Canada’s benchmark five-year rate or your current lender’s rate plus 2%, whichever is higher. Once the new rules are implemented, the rate used will be based on "the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications plus 2%”.
If the new stress test rate was used today, it would be around 4.89% – 30 basis points lower than the current Bank of Canada’s benchmark five-year rate of 5.19%.
How does this affect me?
Overall, the new rules will benefit home buyers and owners who are shopping for a mortgage. To help you get ready for this upcoming change, here are five things to know.
1. It will reduce the gap
Lately, the gap between the average mortgage rate (2.89%) and the benchmark rate (5.19%) has been widening as the average mortgage rates decrease and the benchmark rate remains the same. Once the new rule is in place, the qualifying rate will fluctuate with the average mortgage rate narrowing the gap to a 2% difference.
2. It will make it easier to pass
The new rules should, in the short term, make it easier to pass the stress test and buy a home. Since the average mortgage rate is currently more than 2% lower than the benchmark rate, the new rules will lower the bar to qualify.
While it is possible for the new qualifying rate to be higher than the current one, it won’t be set way too high relative to the market average because it will fluctuate along with the market.
3. Big banks will have less power
The Bank of Canada’s benchmark five-year rate is based on the posted five-year rates of the Big Six Banks. Typically, the posted mortgage rates of the big banks are higher than rates being offered by other lenders.
With the new rules, the big banks will have less control over the qualifying rate as it will use the average weekly median rates and adjust along with the market.
4. It will help home buyers and homeowners
Mortgage shoppers who were close to passing the stress test will be able to qualify for a mortgage once the new rules are implemented. Whether they were a home buyer looking to finance a new home or a homeowner renewing or refinancing a mortgage for their current home.
As well, first-time homeowners will benefit the most from the new rules as they typically carry more debt, such as student debt. The new rules will lower the bar, helping them qualify to buy their home.
5. Housing prices will go up
With more borrowers passing the test and buyers qualifying for more expensive homes, there will be more demand. Due to the increased demand, housing prices will increase. Not to mention, the new rules will be implemented as we head into the busy spring season.
How can I prepare for the changes?
The best way to be ready for the new mortgage stress test rules is to look at your financial situation and work out your budget.