The benchmark rate used to determine the minimum qualifying rate for insured mortgages, known as the “stress test” is changing.

Currently, a home buyer getting an insured mortgage must prove they can afford a payment based on the benchmark five-year posted rate. The Bank of Canada calculates this rate using an average of chartered banks rates, which is currently 5.19 per cent.

As of April 6, the benchmark rate will be based on the Bank of Canada’s  weekly median five-year fixed insured-mortgage rate from federally-backed mortgage insurance applications adjudicated by mortgage insurers, plus two per cent.

If this rate were in effect today, it would be about 4.89 per cent, or 30 basis points, less than the current 5.19 stress-test rate.

This adjustment will allow the stress test to better represent mortgage rates offered by lenders and will be more responsive to market conditions.

At the same time, this new rate will ensure home buyers are able to afford their homes even if:

  • interest rates rise;
  • incomes change; or
  • home buyers are faced with unforeseen expenses.

The decision to adjust the stress test follows a recent review by federal financial agencies.

The minimum qualifying rate for insured mortgages will be the higher of:

  • the borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower plus two per cent; or
  • the new benchmark rate.

For the last year, the Bank of Canada’s benchmark posted rate has been much higher than two per cent over contract rates and has not been responsive to mortgage market conditions.

Here’s how the new stress test works

When a borrower has less than a 20 per cent down payment, the borrower is required to obtain government-backed mortgage insurance.

Here’s what this means to the buyer of a benchmark price home in Greater Vancouver:

Buying a Greater Vancouver condominium

Impact of stress test change

  Benchmark price PTT Total price Down payment Loan amount Mortgage rate

 

Monthly Principal & Interest Income required
Current $663,200* $11,264 $674,464 $67,446 $607,018 5.19% $3,596.39 $143,855
April 6, 2020 $663,200 $11,264 $674,464 $67,446 $607,018 4.89% $3,492.53 $139,701

*January 2020 benchmark price for a condominium in Greater Vancouver

Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020.

PTT calculated at 1% on first $200,000; 2% on remainder

Buying a Greater Vancouver townhome

Impact of stress test change

  Benchmark price PTT Total price Down payment Loan amount Mortgage rate

 

Monthly Principal & Interest Income required
Current $782,500* $13,650 $796,150 $79,615 $716,535 5.19% $4,245.24 $169,810
April 6, 2020 $782,500 $13,650 $796,150 $79,615 $716,535 4.89% $4,122.65 $164,906

*January 2020 benchmark price for a townhome in Greater Vancouver

Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020.

PTT calculated at 1% on first $200,000; 2% on remainder

Buying a Greater Vancouver single family detached home

Impact of stress test change

  Benchmark price PTT Total price Down payment Loan amount Mortgage rate

 

Monthly Principal & Interest Income required
Current $1,431,200* $26,624 $1,457,824 $145,742 $1,312,042 5.19% $7,773.43 $310,937
April 6, 2020 $1,431,200 $26,624 $1,457,824 $145,742 $1,312,042 4.89% $7,548.95 $301,985

*January 2020 benchmark price for a single-family detached home in Greater Vancouver

Note: Mortgage rate shown is before and after the new changes to the B-20 Stress test come about April 6, 2020.

PTT calculated at 1% on first $200,000; 2% on remainder

REALTORS®’ response

Realtors across Canada are recommending the government should review the stress test to ensure local markets are taken in to consideration, and to remove the test from mortgage renewals.

Read more.

Sources of Content:https://www.rebgv.org/news-archive/how-mortgage-stress-test-changes-affects-home-buyers.html