Many first time homebuyers were excited to hear that the Bank of Canada has lowered the rate used for mortgage stress test. The benchmark posted 5-year fixed rate has fallen from 5.34% to 5.19%. It’s the first change since May 9, 2018. And it’s the first decrease since Sept 7,2016 despite a 106-basis-point nosedive in Canada’s 5-year bond rate since November 8.
The benchmark rate (also known as stress test rate or ‘mortgage qualifying rate’) is what federally regulated lenders use to calculate borrowers’ theoretical mortgage payments. A mortgage applicant must then prove they can afford such a payment. In other words, prove that amount doesn’t cause them to exceed the lender’s standard debt-ratio limits. The rate is purposely inflated to ensure people can afford higher rates in the future.
The impact of the B-20 stress test has been very significant and continues to be felt in all corners of the housing market. As expected, the new mortgage rules distorted sales activity both before and after implementation.
For borrowers buying a home with 5% Down payment, this drop in the stress-test rate means:
-Someone making $50,000 a year can afford $2,800(1.3%) more home
-Someone making $100,000 a year can afford $5,900(1.3%) more home (Assuming no other debts and a 25-year Amortization. Figures are rounded an approximate)
For a borrower buying a home with 20% Down Payment, this drop in the stress-test rate means:
-Someone making $50,000 a year, can afford $4,000 (1.4%) more home
-Someone making $100,000 a year, can afford $8,300(1.4%) more home (Assuming no other debts and a 30-year Amortization. Figures are rounded an approximate)
The Bottom line is: Almost no one saw this coming due to the stress test rate’s obscure and arcane calculation method. Read more
This 15-basis point drop in the qualifying rate will not turn the housing market around the hardest-hit regions, but it will be an incremental positive psychological boost for buyers. It should also counter, in some small part, what’s been the slowest lending growth in the five years.
If you feel ready to buy your first home, don’t delay in contacting us. Buying a home is one of the biggest financial decisions you will make, so it is important to know exactly what you can afford and what your mortgage options are.
Original article: www.dominionlending.ca/news