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How mortgage stress test changes affects home buyers

The benchmark rate used to determine the minimum qualifying rate for insured mortgages, known as the “stress test" is changing.

Currently, a home buyer getting an insured mortgage must prove they can afford a payment based on the benchmark five-year posted rate. The Bank of Canada calculates this rate using an average of chartered banks rates, which is currently 5.19 per cent.

As of April 6, the benchmark rate will be based on the Bank of Canada's weekly median five-year fixed insured-mortgage rate from federally-backed mortgage insurance applications adjudicated by mortgage insurers, plus two per cent.

If this rate were in effect today, it would be about 4.89 per cent, or 30 basis points, less than the current 5.19 stress-test rate.

This adjustment will allow the stress test to better represent mortgage rates offered by lenders and will be more responsive to market conditions.

At the same time, this new rate will ensure home buyers are able to afford their homes even if:

  • interest rates rise;
  • incomes change; or
  • home buyers are faced with unforeseen expenses.

The decision to adjust the stress test follows a recent review by federal financial agencies.

The minimum qualifying rate for insured mortgages will be the higher of:

  • the borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower plus two per cent; or
  • the new benchmark rate.

For the last year, the Bank of Canada's benchmark posted rate has been much higher than two per cent over contract rates and has not been responsive to mortgage market conditions.

Here’s how the new stress test works

When a borrower has less than a 20 per cent down payment, the borrower is required to obtain government-backed mortgage insurance.

Here’s what this means to the buyer of a benchmark price condominium in Greater Vancouver:

Buying a Greater Vancouver condominium

Impact of stress test change

 
new-mortgage-stress-test-table-comparison
*January 2020 benchmark price for a condominium in Greater Vancouver Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020. PTT calculated at 1% on first $200,000; 2% on remainder

Buying a Greater Vancouver townhome

Impact of stress test change

 
new-mortgage-stress-test-table-comparison-townhome
*January 2020 benchmark price for a townhome in Greater Vancouver Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020. PTT calculated at 1% on first $200,000; 2% on remainder

Buying a Greater Vancouver single family detached home

Impact of stress test change

 
new-mortgage-stress-test-table-comparison-singlefamilydetached
*January 2020 benchmark price for a single family detached home in Greater Vancouver Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020. PTT calculated at 1% on first $200,000; 2% on remainder

Advocating for REALTORS® recommendations

The Office of the Superintendent of Financial Institutions (OSFI) has announced that it’s considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

OSFI is seeking input from interested stakeholders on this proposal before March 17, 2020.

Your Board is working with the Canadian Real Estate Association to make recommendations to OFSI to review the stress test to ensure local markets are taken in to consideration, and to remove the test from mortgage renewals.

A New Benchmark Rate for Insured Mortgages

Backgrounder

Canada’s framework for government-backed mortgage insurance supports a stable housing market. Mortgage insurance provides eligible Canadians access to mortgage financing at more affordable interest rates with lower down payments (i.e., borrowers with a less than 20% down payment on the value of their home require mortgage insurance). Prudent mortgage standards and regulation support a healthy mortgage market and safer financial outcomes for households.

New Benchmark Rate

A new Benchmark Rate for insured mortgages will replace the Bank of Canada 5-Year Benchmark Posted Rate in determining the minimum qualifying rate (stress test).

The new Benchmark Rate will be:

  • The weekly median 5-year fixed insured mortgage rate as calculated by the Bank of Canada from federally-backed mortgage insurance applications adjudicated by mortgage insurers; plus
  • A buffer of 200 basis points to be set by the Minister of Finance upon the coming into force.
  • The Benchmark Rate will be published on a Wednesday and come into effect the following Monday.

The new Benchmark Rate used to determine the minimum qualifying rate for insured mortgages will come into force on April 6, 2020.

The minimum qualifying rate for insured mortgages will now be the greater of:

  • The borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or
  • The new Benchmark Rate.

The new Benchmark Rate will be more responsive to market conditions by tracking the actual mortgage rates offered by lenders at the application stage. These rates have been shown to be consistent with final mortgage contract rates. Using the application data allows for more timely data to be published.

The Minister of Finance will have the authority to adjust the buffer.

The new Benchmark Rate for insured mortgages will be published weekly on the Bank of Canada’s website, and will be based on submitted mortgage insurance application contract rates.

The new Benchmark Rate for insured mortgages will be published at two decimal places. If, on any given week, there are any delays in updating the new Benchmark Rate, the previous week’s published Rate will stand until a new Rate is published.

Context

Mortgage insurance standards include requirements for a minimum down payment, and maximum mortgage amortization period, along with other factors such as minimum credit scores and maximum debt servicing levels. The standards also include minimum qualifying rates for insured mortgages. Currently, borrowers taking on an insured mortgage must qualify at the greater of the:

  • Borrower’s Contract Rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or
  • Bank of Canada 5-Year Benchmark Posted Mortgage Rate, which is the mode of the posted 5-year conventional mortgage rates offered by the six largest banks.

The Department of Finance Canada, in consultation with the Office of the Superintendent of Financial Institutions, the Bank of Canada, and the Canada Mortgage and Housing Corporation, has reviewed the minimum qualifying rate for insured mortgages.

In 2016, the Minister of Finance required that this test apply to all insured mortgages.    

The Bank of Canada 5-Year Benchmark Posted Mortgage Rate has typically been about 200 basis points (or 2%) higher than the average 5-year fixed contract rate for insured mortgages. For this reason, the Bank of Canada 5-Year Benchmark Posted Mortgage Rate was assessed to be a prudent floor for borrowers, i.e., a buffer against rising interest rates, disruptions to household income, or unforeseen expenses.

Recently, the Bank of Canada 5-Year Benchmark Posted Mortgage Rate has not been as responsive to average mortgage contract rates, tracking at more than 200 basis points, approximately the historical average. The Bank of Canada 5-Year Benchmark Posted Mortgage Rate is also less representative of average contact rates as it only considers Canada’s six largest banks, and the “posted”, and not “actual” rates offered to borrowers by those banks.

The review concluded that mortgage standards continue to ensure borrowers are able to afford their homes even if interest rates rise, incomes change, or families face unforeseen expenses. As well, it concluded that the new minimum qualifying rate (stress test) should be more responsive to changes in market interest rates and economic conditions.


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