Mortgage Stress Test Becomes Less Stressful
The mortgage stress test has placed stress on many would-be homeowners since its implementation early last year. But recent changes to the test’s format will make it a bit easier on homeowners.
A recent drop to the Bank of Canada’s five-year mortgage rate have made the test somewhat easier for mortgage applicants. According to a report from the CBC, the rate rose to 5.34% in May of 2018 and remained steady ever since. However, earlier this week, it was announced that the country’s central bank had reduced the rate to 5.19%.
Proposed by the Office of the Superintendent of Financial Institutions (OSFI) in late 2017 and officially introduced in January 2018, the mortgage stress test is now utilized by mortgage lenders across the country. It allows them to assess a mortgage applicant’s ability to continue making regular payments on an uninsured mortgage while dealing with rising interest rates.
Specifically, the stress test determined whether or not applicants could handle a mortgage at a rate that was 2% higher than the lender’s advertised mortgage rate or the Bank of Canada’s five-year mortgage rate, whichever was higher at the time.
Although its intention was to potentially prevent borrowers from taking on more debt than they could muster, the stress test faced sharp criticism from borrowers and financial experts alike because of its lack of leniency. If a potential client did not pass the test, their mortgage application could be denied.
A report from BNN Bloomberg indicates that home sales across Canada cooled off after the introduction of the mortgage stress test last year. But with a lower benchmark rate in place, home sales may see a slight increase going forward, and that would have a direct impact on mortgage applications.
Given that all homes purchased require a mortgage, homebuyers could potentially face an easier path to approval if their lender administers the test. Additionally, a lower benchmark rate could also give homebuyers additional buying power, allowing them to purchase homes that are slightly larger and more expensive.