Ottawa, ON, February 18, 2020 – Earlier today, Minister of Finance Bill Morneau announced changes to the mortgage stress test.
Recently, the gap between the Bank of Canada’s five-year benchmark rate and borrowers’ actual contract rates has been widening, suggesting the benchmark rate has become less responsive to changes in the market.
The new benchmark rate used to determine the minimum qualifying rate for insured mortgages, coming into effect on April 6, 2020, will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2 percent. So, a few percentage points can translate into thousands of dollars in savings for the borrower.
Agents and economists agree that the recently announced tweaks to Canada’s Mortgage Stress Test bring positive change to the housing industry. The new changes take effect on April 6, 2020, and will apply to insured mortgages.
“REALTORS® have advocated for changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to less-regulated options, and real estate markets across the country in need of relief,” said Jason Stephen, President of The Canadian Real Estate Association. “We are pleased the government has taken steps to address some of these issues in Canadian housing markets.”
“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. 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,” says Bill Morneau, Minister of Finance.
The announcement comes following a review of the mortgage stress test ordered by Prime Minister Justin Trudeau in December 2019 to explore recommendations from financial institutions to make the stress test more “dynamic.”
Federal financial agencies conducted the review and concluded the minimum qualifying rate should reflect the evolution of market conditions. The stress test will be more representative of the mortgage rates offered by lenders and more responsive to what is happening in the market and economy.
Before this new change, Canada’s big six banks determined the benchmark rate, which was then adopted by the Bank of Canada and used as the stress test rate. The rate has been kept high, and this has affected borrowers from qualifying for the best possible mortgage. In some cases, they may not have been able to buy a home at all. The new test will allow more people to qualify, which is welcome news for the new home buyer.
As well, the new rate is more flexible, and this will, in turn, allow it to go with the ebb and flow of the economy.
In an email to BNN Bloomberg, Robert McLister, the founder of ratespy.com, says that “by unhinging the stress test from the big banks’ posted rates, regulators are fixing a glaring policy error.”