The federal government is adjusting the stress-test rate for insured mortgages and it will take affect April 06,2020.
Finance Minister Bill Morneau said on Tuesday, the new stress-test rules will be more responsive to interest rate changes, including a recent drop in lending terms. The stress test is designed to protect consumers and banks from defaulting on their loans in the event of interest rate hike.
Borrowers with an insured mortgage (typically those with less than 20% equity), will need to prove they can afford monthly mortgage payments based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%. The Department of Finance confirmed that the rate would currently equal 4.89% 30 basis points less than today’s benchmark qualifying rate of 5.19%, which is based on the Big 6 banks’ posted 5-year fixed rates. The new benchmark would be published every Wednesday and take effect the following Monday, according to the Office of the Superintendent of Financial Institutions (OSFI), which regulates Canadian banks.
Critics say the big banks have been keeping their 5-year fixed posted rates artificially high since they are used in setting prepayment penalties. But with mortgage rates falling since last year the mortgage stress test has been increasingly out of sync with the actual contract rates consumers are securing.
The Department of Finance said in its announcement that, this adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.
While the industry reaction has been favourable, some said there were likely ulterior motives for the sudden change in policy.
This 30-basis point drop in the qualifying rate, will increase the purchasing power for the insured borrowers by around 5%. So someone who qualified for a $500k mortgage, will now qualify for a $525k mortgage in April 2020.