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First-time home buyers will need to know their financial situation to purchase a property now more than ever, as Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is holding the interest rate used in the mortgage stress test for uninsured mortgages steady.

Client First Mortgages First Time Home BuyersIt is keeping the minimum qualifying rate for uninsured mortgages at the greater of the mortgage contract rate, plus two percentage points or 5.25%.  A news release issued by OSFI on the decision, states: “In an environment characterized by rising mortgage rates, sustained high inflation and potential risks to borrower income, it is prudent that lenders continue to test borrowers for adverse conditions”.

Uninsured mortgage are residential mortgages with a down payment of 20% or more. 

OSFI says it makes decisions on the minimum qualifying rate based on data from its ongoing monitoring of federally regulated financial institutions, as well as a range of vulnerability indicators which include Canadian housing market and broader macroeconomic date.

Mortgage rates have been rising this year as the Bank of Canada has raised its key interest rate target, seven times in an effort to bring inflation under control.

What is the Mortgage Stress Test

Those applying for a mortgage, have to prove they can handle payments that are higher than their actual contract rate given by their lender.  That rate remains 5.25% or the mortgage contract rate plus 2%, whichever is the higher.

For much of the COVID-19 pandemic, when the Bank of Canada’s key interest rate was at historic lows, many Canadian borrowers were qualifying at the 5.25%.

That has changed with the central bank’s rapid hikes to tis benchmark rate through 2022.

After Canada’s biggest banks raised their prime lending rates to 6.45% in response to the Bank of Canada’s 50-basis-point rate increase last week, the stress test for some Canadian mortgage seeks is hitting above 8%.

The Finance Minister said in a statement, that Ottawa’s test for insured mortgages will also remain unchanged.

Some provincially regulated lenders also do not have to subject borrowers to OSFI’s stress test.

Why do we have a Mortgage Stress Test?

The goal of the stress test, is to protect Canadian borrowers and ensure they can continue to make loan payments amid sudden rises in interest rates or economic downturns.

OSFI also said it will launch a review of the stress test and other mortgage underwriting standards in January 2023.  The regulator said it expects to leave the stress test in place after its review.

If you are a First-time home buyer don’t delay, apply online to see what you can qualify for before looking for a property.

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