After calls from many in the Canadian mortgage industry for reform, the mortgage stress test is changing.
“For many middle class Canadians, their home is the most important investment they will make in their lifetime,” Minister of Finance, Bill Morneau, said in a statement on Feb. 18, 2020.
“Our government has a responsibility to ensure that investment is protected and to support a stable housing market. The government will continue to monitor the housing market and make changes as appropriate. Reviewing the stress test ensures it is responsive to market conditions.”
On Feb. 18, Morneau announced that the stress test for insured mortgages will be changing its qualifying benchmark rate, effective April 6, 2020.
The new benchmark rate will be:
- The weekly median 5-year fixed insured mortgage rate as calculated by the Bank of Canada from federally-backed mortgage insurance applications adjudicated by mortgage insurers; plus
- A buffer of 200 basis points to be set by the Minister of Finance upon the coming into force.
The benchmark rate will be published on a Wednesday and come into effect the following Monday.
The minimum qualifying rate for insured mortgages will now be the greater of:
- The borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or
- The new benchmark rate.
If in place today, the rate would equal 4.89% — 30 basis points less than the current benchmark qualifying rate of 5.19%.
Canadian Mortgage Industry Reaction
The news of the stress test change has sparked discussion from Canadian mortgage and financial professionals. While many believe the change is a good start, some say it isn’t yet doing enough to make a real difference.
“We’re quite encouraged by it actually,” Taylor said. “Using the insured market rate is going to be far more dynamic and much more responsive to changes we’ve seen in the market when you compare that to what we’ve seen with the Bank of Canada posted rates for probably the last 15 months.”
However, Taylor also acknowledged that the 2% buffer could still be an onerous test level for many and that it doesn’t answer the issue of limited housing supply.
Dr. Sherry Cooper, Chief Economist at Dominion Lending Centres, said that the new rules will “certainly add to what was already likely to be a buoyant spring housing market” and could give a psychological boost as well.
“While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive,” Dr. Cooper said.
“Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.”
Neil McLaughlin, Group Head of Personal & Commercial Banking at The Royal Bank of Canada, said, as reported by Financial Post, that RBC sees the federal government’s announcement earlier this week of a new floor for the minimum qualifying rates for borrowers as “having quite a minimal impact.”
“Our analysis so far looks like it would be about 25 to 30 basis points reduction in the qualifying rate,” McLaughlin said during a conference call with analysts.
“That’ll really translate into a fairly small increase in purchasing power for the average borrower, probably in the neighborhood of about $20,000, $25,000 on an average mortgage.”
CIBC Deputy Chief Economist Benjamin Tal predicts that the changes would buy the median household in Canada another $13,500 of house, or a boost of less than 3% to their purchasing power.
According to Tal, it is “becoming more and more apparent that, short of drastic measures, it’s impossible to fight supply issues with demand tools.”
Some say it could also shift the mortgage market share.
“The lower qualifying rate should shift a portion of the mortgage market from private unregulated lenders back into the regulated mortgage market,” National Bank Financial analyst Jaeme Gloyn wrote in a note.
Potential Changes To The Uninsured Mortgage Stress Test – Have Your Say
Along with the insured mortgage stress test change, the Office of the Superintendent of Financial Institutions (OSFI) is also considering altering the stress test for uninsured mortgages.
“OSFI is proposing to adopt this same rate in the calculation of the minimum qualifying rate for uninsured mortgages,” the organization stated.
“The new benchmark rate would replace the five-year conventional rate, and would be more representative of the broader market and responsive to fluctuations in actual contract rates.”
The proposed change would be effective April 6 as well to coincide with the changes to the insured mortgage stress test.
OSFI is seeking input from interested stakeholders on this proposal before March 17, 2020.
Long-Term Mortgage Stress Test Impact
What do you think the long-term impact of the mortgage stress test change will be? Will it help fuel the spring housing market? Share your opinion with us on social media. Purview is on Twitter, Facebook, and LinkedIn.
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