18 Feb

Government announces changes to mortgage stress test

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Posted by: Aneta Zimnicki


Finally the government has heeded to some common sense recommendations from the mortgage industry.  Effective April 6, 2020, there will be a slight modification  to the ‘benchmark rate’ used to qualify for insured mortgages.  This should reduce the qualifying rate by about 0.30% if contract rates remain at roughly today’s levels, and translates to about 3% more buying power.

Note, this affects only insured mortgages, meaning ‘high ratio’ less than 20% down payment purchase.  Only owner occupied (single family dwelling up to fourplex) or duplex to fourplex rental purchases can be insured.  As of 2018, insured mortgages accounted for less than a third of new mortgages.

Refinances and single family rentals cannot be insured, and fall into ‘uninsured’ category.   However, a similar qualifying approach for uninsured mortgages is being considered. A communication on this matter is expected by April 1, with changes effective on April 6.

Instead of the more ‘static’ rate approach currently, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.  Perhaps this is adding more unnecessary government bureaucracy and complexity to the stress test.  Although it is a relief to see drop in qualifying rate, now how will buyers time their home buying decision, if rate is changing? Working closely with a mortgage broker is now even more important for this reason, as you can be advised  if your specific situation changes.

According Mortgage Professionals Canada, a more reasonable ‘stress test’  is closer to 0.75% above contract rate (as opposed to 2%). This is based on calculations that take into account income growth and mortgage principal payment over the term of the mortgage.   Current response from head of CHMC (Canada’s largest mortgage insurer, which regulates mortgage insurance)  Evan Siddall, “Calls to reduce the margin (from 200 to 75 bps) do not have traction at present.”  Things may change, as Siddall has announced his departure from CMHC.

We will get more practical clarity once April 6 hits and this test is applied to applications.