Requirements for homebuyers ease after stress test rate falls

Jessy Bains
·3 min read
The Bank of Canada building
(REUTERS)

An easing of the mortgage stress test means it just got a little easier to get a foot into Canada’s housing market.

The Bank of Canada’s 5-year conventional mortgage rate fell from 4.94 per cent to 4.79 per cent. The rate is based on posted 5-year fixed rates at banks, which have been cutting over the past week. Most recently, National Bank cut by 15 basis points on Monday.

It’s also used to calculate the stress test to qualify for a mortgage. In other words, the rate you need to show you can afford to pay if rates went up.

In practice, this means buyers stand to qualify for a larger mortgage when buying a home or refinancing. The change only provides marginally more buying power, but every little bit could help considering how hot some of the country’s housing markets are.

James Laird, President of CanWise Financial, crunched the numbers to show how much buyers with a household income of $100,000 stand to save, based on the following assumptions.

  • Down payment amount: 10 per cent of home price

  • Amortization period: 25 years

  • Annual taxes: $3500

  • Heating: $150

With a stress test rate of 4.94 per cent a buyer would qualify for a home valued at $523,410. At 4.79 per cent a buyer would qualify for a home valued at: $531,230, an approximately 1.5 per cent increase in affordability.

The stress test rate fell below 5 per cent in May, when banks started cutting as COVID-19 helped pushed interest rates lower.

“The Bank of Canada’s conventional 5-year mortgage rate is based on a formula, and mortgage rates are at historic lows, therefore it is logical for the qualifying rate to drop as well,” Laird told Yahoo Finance Canada.

Critics of the stress test have called it too restrictive since it was introduced and have called for easing.

The Office of the Superintendent of Financial Institutions (OSFI) was looking at changing the stress test by shifting it away from the Bank of Canada’s rate to market rates, which are typically lower. But those consultations were put on hold when the pandemic started.

Laird says the current stress test rate is on average around 280 basis points higher than actual rates at banks, depending on the borrower.

Jason Zuckerman, mortgage broker at Mortgage Architects, says the new rate is still punitive.

“The shift from 4.94 per cent to 4.79 per cent will not make someone who can’t afford to buy a house, now be able to buy a house,” Zuckerman told Yahoo Finance Canada.

“The issue here is that it hurts first-time home buyers who are already struggling with increasing home prices. It just creates an extra hurdle for them to get into the market.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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