The NEW Stress Test Takes effect April 6, 2020

The NEW Stress Test Takes effect April 6, 2020

What is the Mortgage Stress Test?

The stress test, first implemented January 1, 2018, imposed on a mortgage loan borrower or a mortgage loan renewal/refinancing homeowner as a means of making sure that the borrower can comfortably afford to take on the mortgage loan over an extended period of time. The Bank of Canada doesn’t just want borrowers to prove they qualify for a mortgage loan - they also require new borrowers to pay additional money over a 5-year ‘stress test’ time span. For borrowers that do not require mortgage loan insurance, the lender must charge the borrower either the conventional 5-year mortgage rate set by the Bank of Canada, or, the interest rate that is negotiated by the borrower and the lender with an additional 2% interest added (whichever interest rate is higher).

If the borrower does require mortgage loan insurance, the lender will impose either the conventional 5-year mortgage rate set by the Bank of Canada or the interest rate negotiated with the lender, whichever is higher.

Mortgage loan insurance is sometimes a requirement by a lender as a means of reassurance that the mortgage loan will be paid back in full, in case the borrower defaults on the loan for any reason.

The NEW Stress Test Takes effect April 6, 2020

The new stress test will affect insured mortgages (those with less than 20% down payment). The rate will now be the weekly median five-year fixed insured mortgage rate plus 2%. If the new stress test changes took effect today, the rate would be 4.89%, says the Department of Finance or 30 basis points less than the current stress-test rate. (BTW, there are 100 basis points in 1%). So, a few percentage points can translate into thousands of dollars in savings for the borrower.

The Benchmark Rate will be published on a Wednesday and come into effect the following Monday.

Critics of the current mortgage stress test say big banks have been keeping their five-year fixed posted rates artificially high. With mortgage rates falling since last year, the stress test has been increasingly out of sync with the actual contract rates consumers are receiving.

“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,” says Bill Morneau, Minister of Finance.

The announcement comes following a review of the mortgage stress test ordered by Prime Minister Justin Trudeau in December 2019 to explore recommendations from financial institutions to make the stress test more “dynamic.”

Federal financial agencies conducted the review and concluded the minimum qualifying rate should reflect the evolution of market conditions. The stress test will be more representative of the mortgage rates offered by lenders and more responsive to what is happening in the market and economy.

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

How This Affects Buyers in 2020

Before this new change, Canada’s big six banks determined the benchmark rate, which was then adopted by the Bank of Canada and used as the stress test rate. The rate has been kept high, and this has affected borrowers from qualifying for the best possible mortgage. In some cases, they may not have been able to buy a home at all. The new test will allow more people to qualify, which is welcome news for the new home buyer.  The new rate is more flexible and will flow with the economy. The timing is perfect, just in time for the spring market which is just now heating up.

Keep in mind

The federal government only regulates major banking institutions and must impose the laws set by the Bank of Canada. Private mortgage lenders, mortgage brokers and other mortgage-related lenders aren’t subject to the same regulations and have far more flexibility when it comes to approving mortgage loans without the ‘stress test’ involved. For more on this check out our previous post on the Stress Test.

REW Feb 28, 2020  https://www.rew.ca/news/destressing-the-2020-mortgage-stress-test