Canada’s Mortgage stress test change

Today, Finance Minister Bill Morneau announced a change to the stress test rate for insured mortgages. Canada's Mortgage stress test change may make it easier for you to get a mortgage.

For insights on how this change affects you, I weighed-in with James Laird, Co-founder of Ratehub.ca and President of CanWise Financial on this change, and what it means for borrowers.

“As a result of Morneau’s review of the stress test he has announced a change to the rate that will be used to stress test insured and insurable mortgages. When the change takes place April 6th, the stress test rate will be set at the average 5-year fixed rate for mortgages applying for default insurance on applications received by CMHC in the past week. Prior to the change, the stress test rate was set at the average of the big bank’s 5-year fixed posted rate. The old system gave the big banks too much control over mortgage qualifying and meant that the stress test rate did not change in correlation with underlying mortgage rates.'

This adjustment means that the way the stress test is calculated for both insured mortgages and uninsured mortgages will be very similar (uninsured mortgages were already stress tested at 2% higher than the rate of a mortgage). Canada's Mortgage stress test change can be good news for new home buyers.

Put simply, Laird says, 'Canadians will be stress tested at a rate that is about 2% higher than the mortgage rate they are receiving. Our expectation is that the stress test will drop to about 4.89% once the change takes effect on April 6, 2020, assuming current market rates. Canadians who are getting insured and insurable mortgages can expect to qualify for a little bit more than what they can today. Homebuyer’s who cannot currently qualify for what they want, but are close, should redo their qualifying calculations using the new stress test. This change will be welcomed by the mortgage industry and consumers.”

Changes to Home Affordability 

According to Ratehub.ca's mortgage affordability calculator, a family with an annual income of $100,000 with a 10% down payment and 5-year fixed mortgage rate of 2.89% amortized over 25 years would have qualified for a home valued at $511,424 under today’s 5.19% qualifying rate.

Under the new stress test rate of 4.89% they can now afford $526,632.

A difference of $15,208 (up by 3%).

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