The mortgage stress test has been in effect for a little over two years now. Whether you’re planning to buy a home or renew or refinance your mortgage this year, it’s important to understand how the stress test works and how it will affect you.
Regardless of if you’re buying a home or you’re already a homeowner and you’re renewing or refinancing your mortgage, the stress test will affect you. You’ll have to pass the stress test for your mortgage to be approved.
In order to pass the stress test, you’ll have to prove that you can qualify at your mortgage rate plus two percent or the Bank of Canada’s five-year benchmark rate (right now at 5.19 percent), whichever is greater.
Let’s say you’re applying for a mortgage with a rate of 2.89 percent. In this case, you’d have to qualify at 5.19 percent since 5.19 percent is greater than 4.89 percent (your mortgage rate of 2.89 percent plus two percent).
Passing the stress test has actually gotten slightly easier over the past few months. For the first time in almost three years, the Bank of Canada’s five-year benchmark rate fell in 2019; it went from 5.34 percent to 5.19 percent. This occurred because enough of the big banks lowered their posted mortgage rates.
Could we see the stress test rate fall further this year? It’s quite possible. TD Bank has already been the first of the big banks to lower its posted rate. This is largely due to the falling government of Canada bond yields as a result of uncertainly in the global markets from coronavirus. If some of the other big banks cut their posted rates, we could see the qualifying rate come down further.
There were some interesting proposals about adjusting the mortgage stress test during last year’s federal election. Conservative leader Andrew Scheer promised to make the stress test more lenient for first-time homebuyers. He also promised to scrap the stress test for those renewing their mortgages. Although the Conservatives didn’t form government, in a minority government situation like we’re in, it is possible we could see some of these ideas revisited.
In a surprising move, the Liberals are actually reexamining the stress test. The Liberals have asked the Office of the Superintend of Financial Institutions (OSFI) to review the stress test and see if changes are needed. Although, there’s no guarantee, at least this is a promising sign that it’s possible we could see some loosening of the mortgage rules sometime this year.
Brought to you by Sean Cooper.