The Bank of Canada rolled out mortgage stress tests several years ago in a bid to ensure people could afford their homes. These stress tests require that potential home buyers could make their home payments if their income fell or interest rates went up. The interest rate used for this calculation is the five year benchmark rate; it uses the posted rates at the Big Six Banks.
The Bank of Canada lowered the five-year benchmark qualifying rate used for mortgage stress tests from 5.34 percent to 5.19 percent. This was the first decline in the qualifying rate in three years. The last time it declined was in September, 2016. At that time, it fell from 4.74 percent to 4.64 percent. It then climbed steadily until now.
Fort McMurray home buyers may wonder how this affects them. Jodi Whalen of Whalen Mortgages says the drop in the interest rate used in the stress test means they can afford up to 1.4 percent when buying a home. This also makes refinancing your mortgage a better deal. Let’s look at the numbers. If you earn 50K per year and have a 20 percent down payment, the lower qualifying rate results in a 4000 dollar higher mortgage you’d be allowed to take out. This is true whether you have an insured or uninsured mortgage.
Note that the government applied the mortgage stress test to uninsured mortgages in January of 2018 as well as any down payment less than 20 percent of the home’s value. The change is a relief for those who want to qualify for an uninsured mortgage. As of January 1, 2018, they had to prove they could make payments at either two points higher than the mortgage rate or the five year benchmark rate.
This won’t cause a housing boom, but it means a few more would-be homebuyers can now qualify for a first time home purchase. It could allow a few to buy a home instead of a condo, too. The more important fact is that the interest rates fell at all. The lower interest rates have simply improved home sales. If the benchmark fell half a point more, then we would see the housing market rebound.
The federal policy makers in Ottawa could heal the housing market by bringing back the thirty year insured mortgage. They could ease the interest rate stress test. They should eliminate the mortgage stress test for those who want to renew their mortgage with another lender. This policy traps many people with their current lender, no matter how bad the current mortgage terms are.
Unfortunately, the head of the CMHC defended the stricter lending rules. This leaves consumers few options. Fortunately, consulting with a mortgage broker like Whalen Mortgages allows you to find a better rate on a mortgage when shopping for a new home or when your mortgage renewal rolls around. They can help you refinance your loan, take out a second mortgage or cash out part of your home equity, as well.