The current stress test requires a homebuyer to prove they can afford a mortgage payment at today's benchmark rate. With the new stress test they will be able to qualify on the weekly median 5 year fixed insured morgage rate plus 2%.
THE NEW STRESS TEST IS A WELCOME CHANGE
There have been many critics of the current stress test rate. This has resulted in many qualified buyers not being approved for an insured mortgage.
THE NEW STESS TEST IS MORE FLEXIBLE
In December 2019, Prime Minister Justin Trudeau directed Finance Minister Bill Morneau to review recommendations from financial institutions to find a way to make the stress test more effective. It ties the benchmark directly to real market rates.
IT WILL BE EASIER TO PASS THE STRESS TEST
For example we have been seeing default-insured mortgage rates as low as 2.36% while the qualifying rate can be around 5.19%. That means mortgage applicants have to qualify for a rate that's 283 basis points higher.
If rates remain around what we have been seeing lately, that gap could narrow by about 30 basis points on April 6th, 2020. That would decrease the income required to buy a $300,000 home by roughly $1,500. (Assuming a 25 year amortization and 5% down payment).
THERE IS A POSSIBILITY THE STRESS TEST RATE CHANGE WILL CAUSE HOME PRICES TO RISE
Analysts predict this is likely. It is estimated the new benchmark rate will result in roughly 3% more buying power for a typical borrower.
With the already competitive start to this year's homebuying season and limited supply, the increased buying power will fuel more competition among buyers. This could potentially lead more purchasers to come in with higher bids.
STRESS TEST CHANGES FOR UNINSURED MORTGAGES
Stress test changes are also on the way for uninsured mortgages. Borrowers with 20%+ equity.
The office of the Superintendent of Financial Institutions (OSFI) controls this test and is considering the same new benchmark qualifying rate. It will also require borrowers to prove they can afford a rate that is 200 bps higher than their actual "contract" rate.
For more information visit the news release from the Department of Finance Canada here.
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