The changes announced in this blog, have been postponed. With the impact on the economy from COVID-19, the regulators have decided to wait on any changes. It is worth to note that at this time the Stress Test has lowered with most mortgage lenders and today (March 31st, 2020) it is currently 5.04%.
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Last week, finance minister Bill Morneau announced that the changes to the stress test for insured mortgages will remove the benchmark currently set by the Big 6 Banks to be replaced with a weekly market median 5 year fixed mortgage rate plus 2%.
There has been quite a bit of hype around this proposal but we have to ask is this really enough of a change?
The insured mortgage (2016) and conventional mortgage (2018) stress test was originally put into place at a time where the interest rate environment was thought to be rising, to protect against the rising housing markets in the GTA, and GVA. The changes did create some cooling off in those markets,coupled with the addition of a foreign buyers tax, however the stress test overall effect went nationwide, cooling markets that were not “hot” to begin with, slowing down some markets to a creeping pace, and pushing 20% of new home buyers out of the market. With the rise in prices again in Toronto- its fair to question if it makes more sense to have a more regional specific strategy to reflect the differences in markets nation wide.
Industry members from Mortgage Professionals Canada (of which Mortgage Sisters West are members), have been meeting with MP’s since the inception of the stress test to ask for 3 key changes;
- A reduction in the stress test to 0.75% above contract.
- Elimination of the stress test for switches at renewal.
- A 30 year amortization for first time buyers.
It’s fairly clear these 3 key changes requested, are not being considered with the April 6th changes.
Our take away.
In the current interest rate environment where a median rate is 2.79% adjusting the qualifying rate to 4.79% will increase buying power by about 3%- approximately $10,000-$15,000 which may be that little bit of relax required for someone negotiating a purchase and going up to their max budget set against the current benchmark of 5.19%.
The adjustment to the stress test is more representative of mortgage rates offered by the entire mortgage market, rather than just the Big Banks. The use of a floating rate, will make the stress test more dynamic and responsive to changing markets and bond rate.
Is this really enough of a change? The 2% above contract rate has been what many industry members claim to be unnecessary. With these new floating changes, should interest rates rise to where they were last winter at 3.89%, these changes will actually decrease what people were qualifying for under the existing benchmark policy.
Furthermore, the use of a changing weekly qualifying rate creates ambiguity and concern as to how a buyer is going to correctly time buying a home. If one week a buyer qualifies at 4.69%, and then 3 weeks later they put an offer on a home and its now 4.89%- this could affect their purchasing power. Until we know more how the proposed modifications will be implemented; pre-qualifying a buyer may become more confusing and the added red tape and paperwork may just add more frustration, information overload and additional stress.
OSFI- is also considering replacing the benchmark rate for uninsured conventional mortgages with a similar fashion.
The reason for this proposal is after reviewing the current qualifying rate structure it has been observed that the gap between actual contract rates and current benchmark is creating a less responsive floor than originally intended. OSFI will announce the intended changes to be more accurate and responsive to market changes on April 1st, to be effective April 6th along with the insured changes.