Department of Finance Announces New Qualifying Rate for Insured Stress Test
The federal government announced on Tuesday it will be changing the benchmark qualifying rate used for Canada’s insured mortgage stress test.
The change, which will take effect April 6, 2020, means borrowers with insured mortgages (typically those with less than 20% equity) will need to prove they can afford monthly mortgage payment based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.
The Department of Finance confirmed that rate would currently equal 4.89%, 30 basis points less than today’s benchmark qualifying rate of 5.19%, which is based on the Big 6 banks’ posted 5-year fixed rates.
Critics say the big banks have been keeping their 5-year fixed posted rates artificially high since they are used in setting prepayment penalties. But with mortgage rates falling since last year, the mortgage stress test has been increasingly out of sync with the actual contract rates consumers are securing.
“This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions,” the DoF said in its announcement.
The news comes following a review of the mortgage stress test that was ordered by Prime Minister Justin Trudeau in December to explore recommendations from financial institutions to make the stress test more “dynamic.”
Changes to the Uninsured Stress Test Rate Coming Too?
At the same time, the Office of the Superintendent of Financial Institutions (OSFI) delivered its own announcement that it is considering the same benchmark rate for its stress test on uninsured mortgages (those with more than 20% down payment).
“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.
The move was preceded by hints from OSFI’s Assistant Superintendent, Ben Gully, who said in a recent speech recently that “the posted rate is not playing the role that we intended.” He added that the “difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”
OSFI said it is currently accepting input from stakeholders by email until March 17, 2020.
Industry Reaction to the Stress Test Change
Mortgage Professionals Canada (MPC) has been calling for the stress test rates to be uncoupled from the Bank of Canada’s posted 5-year fixed rate since the insured stress test was introduced in 2016. The association welcomed the announcement, saying the use of a floating rate will make the stress test more dynamic and responsive to changing markets and bond rates.
“We thank the government for acknowledging this issue and making these changes,” Paul Taylor, President and CEO of MPC, wrote in an email to membership. “We do, however, still consider a two percent (2%) buffer to be an onerous test level given the economic realities globally”.
Taylor said the association will continue to ask for additional support measures for those still struggling to pass the stress test.
“Included in our asks will be the reintroduction of an insurable 30-year amortization for first-time buyers, and increases in the income maximum multipliers under the newly introduced First Time Home Buyers Incentive Plan,” he said.
While industry reaction has so far been favourable, some said there were likely ulterior motives for the sudden change in policy.
“It’s a political move. The government said they would do ‘something’ about high-ratio buyers in the last election, so now they have,” Ron Butler of Butler Mortgage told CMT. “I suppose if the ‘average rate’ drops enough to produce a 4.39% qualifying rate, then we will see some real changes.”
As it stands, Butler estimates the 30-basis point drop in the qualifying rate will increase the purchasing power for insured borrowers by around 5%.
“Someone who qualified for a $500K mortgage yesterday will qualify for $525K in April,” he said.