Bank of Canada lowers rate to 5.19% used in mortgage stress test, making it easier to qualify!

The Bank of Canada has lowered the rate used by mortgage stress tests which is used to determine whether would-be homeowners can qualify. This marks the first drop in three years. The central bank’s five-year benchmark qualifying rate is now 5.19 per cent, down from 5.34 per cent. This is the first decrease in the five – year fixed mortgage rates since September 2016 when it dropped to 4.64% from 4.74% and increased steadily since.           

The qualifying rate used in stress tests is for both insured and uninsured mortgages. A lower rate means it becomes easier for borrowers to qualify. The 15-basis point drop in the qualifying rate will not turn the housing market around but will be an incremental positive psychological boost for home buyers. This drop should help counter, in some small part, what has been the slowest lending growth in the last five years.

Home Buyer

Last year, home sales softened after the federal government introduced the new stress test rules for uninsured mortgages, or those with a down payment of more than 20 percent, and mortgage rates inched higher. These stress tests require potential homebuyers to show they would still be able to make mortgage payments if faced with higher interest rates or less income. The Bank of Canada’s five-year benchmark rate is calculated using the posted rates at the Big Six Banks.

As of Jan. 1, 2018, to qualify for an uninsured mortgage borrower needed to prove they could still make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the central bank’s five-year benchmark rate. An existing stress test already stipulated that homebuyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the central bank’s benchmark five-year mortgage rate.

Meanwhile, home sales have improved in recent months as mortgage rates have moved lower. But on Thursday, the Ontario Real Estate Association called for less stringent mortgage rules, saying that policy changes are needed to counter a downward trend in home ownership. OREA’s chief executive Tim Hudak said in a letter to federal policymakers that Ottawa should consider restoring 30-year insured mortgages, ease up on the interest rate stress test and eliminate the test altogether for those renewing their mortgage with a different lender.

Home Sale

Borrowers looking to renew their mortgages are subject to stress tests if they switch to a new lender, but not if they stick with their current one. In a May letter to policymakers, the chief executive of Canada Mortgage and Housing Corporation defended the stricter lending rules, arguing that “the stress test is doing what it is supposed to do.”