With a change to the mortgage stress test on the way, your homebuyer client will be able to consider a bigger mortgage — though it likely won’t be significantly bigger.
Last week, the federal government said it was changing the stress test for insured mortgages, effective April 6, to make the test more dynamic.
Right now, the minimum qualifying rate is currently the greater of the borrower’s contract rate or the Bank of Canada’s five-year benchmark mortgage rate (which in turn is based on the Big Six banks’ posted mortgage rates).
Once the change is implemented, the test will be based on the contract rates on all insured mortgages. Thus, the new minimum qualifying rate will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.
The change makes the stress test more dynamic, because contract rates are set weekly, said Benjamin Tal, managing director and deputy chief economist at CIBC Economics, in a weekly report.
Considering current rates and housing prices, the change would allow clients to take on a slightly bigger mortgage: the difference between the old rate and the contract rate, plus 200 basis points, is currently about 30 basis points.
“For the average household in Toronto with an income around $100,000, this would increase how much they can borrow by about $13,000,” said RBC economist Colin Guldimann in a report. “Borrowers with higher incomes or larger down payments would see their maximum loan sizes move up somewhat more.”
The increased amount roughly translates to less than a 3% improvement in purchasing power, Tal said in the CIBC report. “The modifications […] are not a game-changer,” he said.
Also, because market conditions pass through to the new qualifying rate more quickly, new homebuyers could be subject to volatility.
For example, “While the new test may lower the bar as of April, it may make qualifying a bit more difficult if rates start to rise, as they did in 2018,” Guldimann said in the RBC report.
Potential volatility would be more concerning in the spring, when Canadian homebuyers are most active in the housing market.
“[G]iven the quick response of the new test to changes in rates, a short-lived change in the five-year rate, say, in February, will have a less significant impact on the number of qualifying borrowers than a similar rate change in April,” Tal said in the report.
In the near term, clients who are home-shopping will likely see little rate volatility. “Given the current low level of rates and with markets fully priced for a cut [by the central bank] in July, there is limited scope for market rates to move significantly,” Guldimann said.
While the change so far applies to insured mortgages, it’s expected to apply to uninsured mortgages as well (the Office of the Superintendent of Financial Institutions is in consultations concerning uninsured mortgages).