Bank of Canada Lowers Qualifying Rate Used In Mortgage Stress Tests

Bank of Canada Lowers Qualifying Rate Used In Mortgage Stress Tests

The Bank of Canada has lowered the rate used by mortgage stress tests to determine whether would-be homeowners can qualify, marking the first drop in three years.

The central bank's five-year benchmark qualifying rate is now 5.19 per cent, down from 5.34 per cent.

It's the first decrease in the five-year fixed mortgage rate since September 2016, when it dropped from 4.74 per cent to 4.64 per cent, and increased steadily since.

Rob McLister, founder of mortgage comparison website RateSpy.com, says the dip will increase the buying power for mortgage borrowers by allowing them to afford up to 1.4 per cent more home.

For example, someone putting a 20-per-cent down payment on a home who makes $50,000 per year can now afford $4,000 more home, according to calculations by Ratespy.com.

“It will have an incremental boost for housing,” McLister told BNN Bloomberg’s Greg Bonnell Friday.

“This, on its own, obviously is not going to turn the housing market around. But if we get maybe another half-point cut in the stress test rate, it could be material for housing.”

The qualifying rate is used in stress tests for both insured and uninsured mortgages, and a lower rate means it is easier for borrowers to qualify.

These stress tests require potential homebuyers to show they would still be able to make mortgage payments if faced with higher interest rates or less income.

The Bank of Canada's five-year benchmark rate is calculated using the posted rates at the Big Six Banks.

Home sales softened last year after the federal government introduced new stress test rules for uninsured mortgages, or those with a down payment of more than 20 per cent, and mortgage rates inched higher.

As of Jan. 1, 2018, to qualify for an uninsured mortgage, borrowers needed to prove they could still make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the central bank's five-year benchmark rate.

An existing stress test already stipulated that homebuyers with less than a 20-per-cent down payment seeking an insured mortgage must qualify at the central bank's benchmark five-year mortgage rate.

The federal financial regulator has said that the new, stricter regulations aimed to tighten mortgage lending and take some of the risk out of the market.

Meanwhile, home sales have improved in recent months as mortgage rates have moved lower.

But on Thursday, the Ontario Real Estate Association called for less stringent mortgage rules, saying that policy changes are needed to counter a downward trend in home ownership.


OREA's chief executive Tim Hudak said in a letter to federal policy-makers that Ottawa should consider restoring 30-year insured mortgages, ease up on the interest rate stress test and eliminate the test altogether for those renewing their mortgage with a different lender.

Borrowers looking to renew their mortgages are subject to stress tests if they switch to a new lender, but not if they stick with their current one.

In a May letter to policy-makers, the chief executive of Canada Mortgage and Housing Corporation defended the stricter lending rules, arguing that "the stress test is doing what it is supposed to do."

https://www.bnnbloomberg.ca/bank-of-canada-lowers-qualifying-rate-used-in-mortgage-stress-tests-1.1289707