Blog

Mortgage Stress Test Falling

By Joe Torraca on August 17, 2020 No Comments
Mortgage Stress Test Falling

The mortgage stress test rate has fallen once again. This is the third time since Covid-19 started. In this article we’ll look at what the mortgage stress test is, why does it matter and what the lower stress test rates means for you if you’re thinking of buying a home or your mortgage is coming up for renewal.

What is the Mortgage Stress Test and Why Does it Matter?

Banks and mortgage brokers use the stress test to determine if you qualify for a mortgage. Under the stress test, they use a made-up mortgage payment for qualifying you. You must be able to prove that you can afford mortgage payments at your mortgage rate (referred to as the contract rate) plus two percent or the mortgage stress test rate (also referring to as the benchmark qualifying rate), whichever is greater.

Regulators want you to be able to prove that you can afford higher mortgage rates if and when they arrive. They want you to help avoid “payment shock” if mortgage rates are a lot higher when your mortgage comes up for renewal.

The Mortgage Stress Test Falls for the Third Time Since the Start of Covid-19

For the third time since the pandemic started, the mortgage stress test rate has fallen. The posted 5-year fixed rate of the big banks have been inching lower in recent months due to Covid-19 negatively affecting the Canadian economy. The posted 5-year fixed have fallen enough that the Bank of Canada has dropped the stress test rate from 4.94 percent to 4.79 percent.

This is a big deal because the posted rates of the big banks is a metric used by the Bank of Canada to determine the mortgage payments qualified borrowers can comfortably afford. The stress test was originally brought in 2016 for those with insured mortgages. It was soon expanded to those with uninsured mortgages.

The idea of the stress test was to cool off an overheated real estate market. Some would argue that it’s done the job. Home prices haven’t been growing at the same level pre stress test in many areas. Although, there may be other factors at play driving the demand of the housing market.

Passing the Mortgage Stress Test

Even if you can afford the monthly payments at current mortgage rates, you have to pass the stress test in order to get a mortgage. The stress test has acted as a barrier to entry to those who want to enter the housing market and can afford the monthly payments, but can’t pass the stress test.

As mentioned earlier, previous to this the stress test rate has already fallen twice since the beginning of the Covid-19 pandemic. The stress test rate first fell in the middle of March by 0.15 percent from 5.19 percent to 5.04 percent. Then it fell again a couple months later in May by 0.10 percent from 5.04 percent to 4.94 percent.

The latest rate reduction means that if you’re a qualified borrower, you can afford to spend more on a home than you were able to prior to the change all things considered equal. Even if your income, debt and down payment are the same, you can qualify for more mortgage money.

The latest change gives borrowers about an increase of 1.5 percent in their home buying purchasing power. If you have a household income of $100,000 and were putting 10 percent down on a property, you could afford to spend roughly $523k on a home at a stress test rate of 4.94 percent. However, at a lower stress test rate of 4.79 percent, you can afford to spend slightly more, about $531k on a home. That’s an increase in purchasing power of about $8k. Not a huge difference, but not a drop in the bucket either.

Qualifying for Mortgages

Over the past several years, the government and regulators have made it tougher for Canadians to qualify for mortgages. It’s nice to see homebuyers catch a break for once.

The Office of Superintendent of Financial Institutions (OSFI) had made plans to change how the stress test was calculated back in February. However, those plans like many others were put on hold due to Covid-19. Crown corporation the Canada Mortgage and Housing Corporation has since introduced stricter rules for insured mortgages. However, the two other mortgage insurers didn’t follow suit, leaving mortgage rules the way they were.

It’s interesting to note that the stress test rate went up a lot faster than it has gone down. The big banks like National Bank wasted no time in hiking their posted rates when rates were trending up. Now, the banks seem to be taking their sweet time cutting the posted rate. This is largely due to mortgage penalties.

The big banks calculate their fixed rate mortgage penalties based on their posted rates. If posted rates were to fall, the banks would make less profits from mortgage penalties. They’re already hurting from Covid.

Conclusion

The reduction in stress test rate comes at a time when Canadian mortgage rates at record lows. We haven’t seen mortgage rates this low since the financial crisis in 2008. If you’re a well-qualified borrower with a stable job situation, there’s never been a better time to buy.

Are you considering buying a home? Reach out to our offices today. We can help to see if homeownership makes sense for you.

Related:

Avatar

Joe Torraca


consolidation gone wrong

When Does Debt Consolidation Go Wrong?

By Debt.ca on September 23, 2020

Individuals considering debt relief often ask “When does debt consolidation go wrong?” People who are burdened with multiple debts often resort to getting a debt consolidation loan to solve their financial struggles. This approach is believed to give you relief since you’ll merge your debts into a single manageable payment, and it can lower the…

Hands opening an empty leather wallet with above laptop

What is Insolvency?

By Sean on September 21, 2020

Insolvency is a financial state where you’re unable to meet your debts as they come due. When used as a commercial term, it means that your business is unable to pay off its debts. It is typically defined in two separate ways: cash flow insolvency and balance sheet insolvency. Let’s look at both now. Cash…

Couple considering debt settlement

Is debt settlement right for me? Consider this…

By Debt.ca on September 15, 2020

Asking “Is debt settlement right for me?” might not be the right question. There are some considerations to keep in mind when you seek debt relief. For anyone struggling to pay their credit card debt and bills, the stress can be overwhelming. In many cases, the debt continues to climb, despite making payments despite making…

When a consumer proposal ends paperwork

What You Need to Know After A Consumer Proposal 

By Debt.ca on September 9, 2020

For people who have debt problems, one of the best debt solutions to escape such a predicament is to file a consumer proposal. In the first quarter of 2019, the number of consumer insolvency filings reached 32,000. Despite this high number of filings, there are still folks out there who don’t know about consumer proposals….

Leave a Comment

Free Savings Estimate

How much do you owe?

$100,000

$5,000
$100,000
Live Chat
Welcome to our Live Chat
Agents are not available at this time. Please leave a message. Thank you.
First Name
Last Name
Phone
Email
Postal Code
Debt Amount
 
PHP Live! powered