Canadian Mortgage Stress Test to Become More Lenient
For the first time since the federal government implemented the new stress test rules on Canadian home loans, the standards have been lowered. In other words, a potential homebuyer could be approved for a bigger mortgage today than what they would have been yesterday.
Since the initial mortgage stress test came into effect in January 2018, first time home buyers have had a challenging time getting approved. Because of this, they have had trouble breaking into the market, causing it to slow down noticeably. Regardless of what discounted interest rate a potential buyer may receive; for a regulator to sign off on the mortgage, the borrower’s finances have to pass a stress test. The home loan in question is looked at as though it is for more money. The reason behind the test was to save borrowers from buying more than they what they can afford. Giving them some assurance that they have some financial wiggle room in the event of an interest rate rise.
The stress test is set one of two ways;
a) it is based on what the average five-year posted rate is at Canada’s big banks;
b) two percentage points above the actual mortgage rate.
The rate is determined by the highest of the two. The Bank of Canada has changed its interest rate since May 2018. At that time it rose to 5.34 percent. However, this week – for the first time in several years – it dropped down to 5.19 percent.
Giving Home Buyers More Purchasing Power
The impact that the 5.34 to 5.19 percentage drop offers is significant in that it allows people to qualify for a bigger mortgage than they would have been able to before. Even if their finances have stayed the same. Therefore giving them slightly more purchasing power, and allowing them to broaden their home search – somewhat.
Rate comparison website Ratehub.ca looked at the math. They determined that with the new drop, the average borrower can typically afford just under 1.5 percent more home than what they could before. Assuming the borrower went in well prepared, this means with a down payment of at least 20 percent, zero other debt and has an annual income of at least $100,000. Under the previous stress test, a homeowner in this same situation would have qualified for a home valued about $589,000. Whereas, today, that same home buyer can buy a house worth $597,000.
Purchasing Power Doesn’t Necessarily Make Things Easier
While home buyers will have more breathing room with a lower rate, it doesn’t make their mortgage any easier to pay off. All it does is allows them to, in theory, purchase a slightly more expensive home than they would have been able to before.
Kyprianou says the stress testing level shifting almost imperceptibly lower is likely to help the market by merely instilling confidence. It’s not just the theoretical testing level that’s lower, the actual mortgage rates are also falling.
The fixed mortgage rates are decided on what’s happening within the bond market. And for the past few months, that market has been signaling that it expects cheaper lending rates in the not too distant future.
The U.S. central bank could, in theory, cut its benchmark interest rate as early as the end of July. The interest rates are expected to stay stable for a while. The Bank of Canada is not immune to the impact of global forces, which could cause interest rates to drop even lower.
Kyprianou goes on to say that as long as house prices don’t crater, rates in the real world dropping will have a more significant impact than this shift.
For more information on how much you can qualify for a mortgage, don’t hesitate to contact us.
The management team at The Mortgage Centre – Sky Financial Corporation