There was good news for home buyers yesterday as the Federal government announced changes to the insured mortgage stress test that will make it easier to qualify for a mortgage.
The stress test was first introduced in 2016 for insured mortgages and its aim was to ensure that buyers could afford to meet payments in the event that interest rates increased. To do this, the rules stated that buyers taking out insured mortgages must qualify at, either the Bank of Canada’s conventional five-year mortgage rate or the interest rate of the lender, whichever is highest.
In 2018, the stress test was extended to insured mortgages (those with a down-payment of 20% or greater), with borrowers needing to qualifying at either the Bank of Canada’s conventional five-year mortgage rate or the interest rate of the lender plus 2%, whichever is the higher of the two.
Those changes seemed to have a cooling effect on the market, with buying power reduced for many. However, it didn’t please everybody. There has long been a debate about the merits of the stress test because it also had the effect of keeping many first-time buyers out of the hot real estate markets in the Greater Toronto Area and Vancouver.
The changes announced by Minister of Finance, Bill Morneau, yesterday seem to be addressing some of those concerns while also maintaining the importance of the stress test. The minister revealed that, effective April 6, the benchmark rate used to determine the qualifying rate will change. Going forward, the rate used will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.
In effect, for most people this will reduce the maximum qualifying rate, thus allowing buyers to borrow more money. In the view of the government, with the stress test remaining, it will also ensure stability in the housing market. Protecting buyers against any future increases in rates.
Speaking about the changes, the Minister of Finance said: ““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.”