Mortgage Stress Test Changes

There has been alot of talk around the new mortgage stress test announcement and so we asked our Mortgage Sepcialist Rylan Hahn with The Mortgage Centre - Roost Mortgage to break it down for us and he did a fantastic job of keeping it simple! 

Positive changes to the stress test rate:

Last week it was announced that there was an upcoming change in the stress test that affects how much mortgage you are able to qualify for.  Since the announcement there have been many positive remarks and commentary that acknowledges that the sometimes obtuse government regulator is listening to Canadians and making some progressive changes.  I have included details of the change below along with analysis so that you are able to see how this can benefit you.

Background:
  • In late 2016 the government of Canada instituted the "stress test" for mortgage qualification
  • This resulted in Canadians having to qualify at a mortgage rate behind the scenes that is significantly higher than their actual mortgage rate.
  • The effect of these changes was the amount of mortgage you are able to qualify for was reduced by about 18%.  For example if you were previously approved for $500 000, it was decreased to $410 000 (almost overnight)
Information on the new changes:
  • Effective April 8, the method of calculation for the stress test will change from the bank posted rate of 5.14% to a rate 2% above the average discounted 5 year fixed rate.
  • This means that the qualifying rate will float with rate changes and currently it would be reduced to 4.89%.
  • These changes are only for purchases with less than 20% down payment however it is highly likely they will also be adapted to purchases with 20% down payment or more.
Analysis:
  • Lets look at a case study to see the actual effects.  If your maximum purchase price with 5% down payment is $400 000 based upon the current requirements, once the changes come into effect your maximum purchase price would increase to $412 000.
  • With the rates at their current level and projected to be decreasing, this is very positive.  However the other side of the coin is if rates increase as they did in the winter of 2019, your qualifying amount will also decrease.
Final thoughts:

I think the idea behind the changes is positive as it shows the desire to adapt to changing rate environments in a fair and balanced method.  However, in the context that the stress test was a hastily invented government policy in late 2016 that has shown to be harmful to many markets outside of Toronto and Vancouver, this is a relatively minor rebalancing of a policy and system that should perhaps be completely reevaluated.  Hopefully this policy change is a first step in a series of progressive changes to help Canadian homeowners.
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