Changes will be coming to how the mortgage stress test is applied to insured and potentially insurable mortgages on April 6th, 2020.
Currently, all mortgages are subjected to a stress test where applicants must be able to afford the monthly payments of a mortgage with an interest rate equal to the Bank of Canada's Posted 5-year Rate or the mortgage contract rate the borrower has been approved for plus 2%. Whichever one of these two is greater, is the qualifying rate used for the mortgage stress test.
Currently, the Bank of Canada has had a posted rate of 5.19% and previously had the posted interest rate at 5.34% when rates were higher in 2018. Since this stress test has come in, it has been very rare for a client to have to qualify under the stress test using their contract interest rate plus 2%. Most of the time, the higher interest rate between the two has been the Bank of Canada's posted 5-year rate.
With bond yields continuing to fall and a weak loonie, many people have been calling for a change to the mortgage stress test rules. Finally, we have the change people have been asking for.
Instead of the Bank of Canada using 5.19% which is linked to the chartered banks posted rates, the Bank of Canada will be taking an average of what all prime lenders are offering for 5-year fixed contract rates and applying that as their posted rate. If interest rates stay the same until April 6th, 2020 that would be 4.89%.
This 0.30% decrease in the Bank of Canada's qualifying rate will allow borrowers to see a 3% increase in affordability. $600,000 purchase price under current stress test policies will turn into just under $620,000 after April 6th, 2020 if interest rates stay the same. This might not seem like a lot, but the fact that the Bank of Canada's 5-year Posted Rate will be actively changing with the market is a great sign.
To read more from Dominion Lending Centres Chief Economist Dr. Sherry Cooper, please click on the following link. You may also feel free to reach out to either Kevin or Ryan if you have any questions on affordability and these changes.