Passing the mortgage stress test is about to get easier while allowing buyers to borrow more to buy a home.
The stress test, or B20, requires borrowers to qualify at an interest rate higher than what they would actually pay in order to ensure they can keep up with payments if rates rise. The federal government implemented it in 2018 to add stability to what many called an over-heated housing market.
In the face of growing calls to reconsider it, Ottawa is changing the way borrowers qualify for an insured mortgage (less than 20 per cent down payment) as of April 6.
Currently, the Bank of Canada’s 5-Year benchmark posted rate is what determines the minimum qualifying rate. Soon, the Department of Finance says it will use the weekly median 5-year fixed insured rate, plus a 2 per cent buffer that Finance Minister Bill Morneau can adjust as needed.
“Our government has a responsibility to ensure that investment is protected and to support a stable housing market.” he said in a release.
“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.”
The change was made to better reflect market conditions.
“The old system gave the big banks too much control over mortgage qualifying and meant that the stress test rate did not change in correlation with underlying mortgage rates,” James Laird, co-founder of Ratehub.ca, told Yahoo Finance Canada.
Laird expects the change to translate to a drop in the qualifying rate of 5.19 per cent today to 4.89 per cent. So, anyone who wasn’t qualifying for the mortgage amount they need should try again with the new calculations.
“According to Ratehub.ca's mortgage affordability calculator, a family with an annual income of $100,000 with a 10% down payment and 5-year fixed mortgage rate of 2.89% amortized over 25 years would have qualified for a home valued at $511,424 under today’s 5.19% qualifying rate,” said Laird.
“Under the new stress test rate of 4.89% they can now afford $526,632.”
Affordability remains an obstacle
When the mortgage stress test was first introduced, it put a bit of a chill on the housing market. Prices and sales subsequently fell as buyers digested the new rules.
But that didn’t last long and the country’s biggest markets have once again started heating up.
Christopher Alexander, executive VP, RE/MAX Ontario-Atlantic Canada says the new rules can help first-time buyers get into the market but doesn’t fix supply and demand imbalances plaguing cities like Toronto, where the average price of a home is up 12.3 per cent compared to the same period last year to $839,363.
“We need to continue to push for housing affordability, as well as an increase in housing supply for buyers and renters, but we have yet to see a comprehensive national housing strategy to help facilitate this shift,” Alexander told Yahoo Finance Canada.
Bringing more buyers into the market, however marginal, will only have the opposite effect.
The Office of the Superintendent of Financial Institutions (OSFI) is seeking input from stakeholders on whether uninsured mortgages should get the same treatment.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.