Three years ago, the Bank of Canada enacted the Mortgage Stress Test to assess whether a borrower could withstand higher interest rates while also trying to bring more balance to the country’s real estate market. The bank’s minimum mortgage qualifying rate has dropped to 5.19% from 5.34% and will help increase the buying power for mortgage borrowers allowing them to afford a home up to 1.4% more.
The decrease in the qualifying rate will mean that both insured and uninsured mortgages will receive a lower rate and make it easier for borrowers to qualify. The stress test requires potential buyers to show that they would still be able to make their mortgage payment if they were faced with higher interest rates and less income.
The decrease in the mortgage rate will help alleviate the pressure put on first-time homebuyers who are financially strained by the Canadian housing market. The reduced rate will allow buyers to qualify for bigger mortgages, even if their finances have stayed the same and giving buyers more purchasing power. This will also help the market pick back up since home sales softened over the last year due to the stipulations of the stress test.
The existing stress test stipulates that homebuyers putting down a downpayment of less than 20% and are seeking an insured mortgage must qualify at the central bank’s benchmark five-year mortgage rate. The five-year rate is based on the data collected by the six largest banks. Buyers can now afford a home that is 1.4% more than they previously could assuming their downpayment was at least 20%.
Currently, the Ontario Real Estate Association is calling for less stringent mortgage rules and claim that the policy changes are needed to counter the downward trend in homeownership.
The chief executive of Canada Mortgage and Housing Corporation has been defending the lender rules and argues that the stress test is doing what it is supposed to do. While the bank is expected to stand firm on the rate drop for a while, the global market may help push rates even lower over the next couple of years.