Changes to The Stress Test
Wednesday Feb 19th, 2020
Changes to mortgage stress test to make it easier for some homebuyers to qualify
Just as the Toronto housing market is gaining steam, the federal government is adjusting the stress-test rate for insured mortgages. The move is expected to make it easier for some people to purchase a home starting April 6.
But some fear it could also fuel the GTA’s already hot housing market.
Finance Minister Bill Morneau said on Tuesday the new stress-test rules will be more responsive to interest rate changes, including a recent drop in lending terms. The stress test is designed to protect consumers and banks from defaulting on their loans in the event of an interest rate hike.
“The government will continue to monitor the housing market and make changes as appropriate,” he said in a statement.
The mortgage stress test is designed to protect banks and borrowers in the event that interest rates rise enough that homeowners can no longer make their payments.
Under the new stress test, borrowers with insured loans will have to qualify at two per cent above the rate their bank is offering or two per cent above a new weekly median five-year insured mortgage rate that will be based on mortgage insurance applications.
James Laird, co-founder of Ratehub.ca, an online financial hub, calculates that rate would be about 4.89 per cent.
The current stress test requires borrowers to qualify at two per cent more than the rate their bank is offering or two per cent more than the Bank of Canada five-year benchmark of 5.19 per cent.
“We know first-time homebuyers are right at the margins struggling to get into the market so every little bit is helpful. Every regulatory change that has happened in the last 10 years has made it a little bit harder to enter the market. This one makes it slightly easier,” Laird said.
Morneau said the adjusted test, based on the new weekly benchmark, will continue to protect consumers in the event of a rate hike.
The new benchmark would be published every Wednesday and take effect the following Monday, according to the Office of the Superintendent of Financial Institutions (OSFI), which regulates Canadian banks.
“But it does mean the changes in the stress test will be there if the average or the median of interest rates provided by the banks actually goes down or up. It will actually adjust appropriately to dynamic market conditions meaning there will be a 200-basis-point protection that remains there,” he said.
Toronto broker John Pasalis of Realosophy said the change won’t have much impact on the housing market while it’s confined to insured mortgages. But he noted that OSFI is also expected to adopt the new benchmark rate for uninsured mortgages on April 6.
The number of uninsured mortgages was rising with less than a third of new mortgages going to insured loans in 2018, according to Canada Mortgage and Housing Corp.
Market researcher Ben Rabidoux of North Cove Advisors, who tracks housing inventory in Canadian markets, said the more dynamic stress-test rules make sense. But they coincide with an already tight Canadian housing market.
The supply of listings is particularly low in the GTA, especially for entry-level homes with condo sales hitting a 25-year low in January.
“You’re going to be racing against rapidly rising house prices in the spring, unfortunately,” he said.
The difference in the rates would mean someone buying a $511,424 home could afford to borrow an additional $15,208 and upgrade to a $526,632 home, according to Ratehub. That is based on a buyer with a household income of $100,000, a 10 per cent down payment and a five-year fixed mortgage rate of 2.89 per cent over 25 years.
The Toronto Regional Real Estate Board has forecast Toronto-area home prices will rise 10 per cent this year. But that could be conservative if the supply of new listings continues to dwindle as it has in recent months while sales climb.
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