Changes to Mortgage Stress Test

In a Release on February 18, 2020 the Mortgage Professionals of Canada (MPC) reported on a Release by the Minister of Finance regarding changes to the stress test.  I will review the MPC's Release first, then add my own comments.

The MPC Release reports that the Minister of Finance has announced that the benchmark qualifying rate for insured mortgages will change effective April 6, 2020.  The new benchmark qualifying rate for a 5-year fixed insured mortgages "will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus a two percent (2%) buffer."  [Translation; the median market rate of the five major banks.]

[The current qualifying rate is either the above rate or the Bank of Canada (BOC) posted 5-year fixed rate, whichever is higher.]

The Release notes that also today the Office of the Superintendent of Financial Institutions (OSFI) announced that it is considering this change.  [Mortgages with less than 20% down payment are under the jurisdiction of the Ministry of Finance and mortgages with 20% or more down payment are under OSFI.]

MPC state that they have been recommending removing the BOC posted rates from the stress test since its introduction in 2016.  [When the first stress test for mortgages with less than 20% down payment was introduced.]  "Setting the floating rate on the insured contract rate will make the test more dynamic and responsive to market and bond rates."   MPC do "thank the government for acknowledging this issue and making these changes."

MPC further comment they "still consider a two percent (2%) buffer to be an onerous test level given the economic realities globally."  At their 5th Parliament Hill day tomorrow [February 19th] they will continue to ask for additional support including an insurable 30-year amortization mortgages for first time buyers and increases in the income maximum multipliers under the First Time Home Buyer Incentive Plan.  [Talk to a Mortgage Broker about this plan and it conditions with respect to your personal situation.]

Also included in the MPC Release are links to the Ministry of Finance and OSFI Releases.

My thoughts include:

  1. This is likely a marginal rate improvement:  Talking to a mortgage broker today, the above median rate would be about 2.89%, plus 2% leads to a qualifying rate of 4.89%.  The posted rate by the Bank of Canada is 5.19%.
  2. I had heard about potential changes coming since the beginning of the year and had hoped for a reduction in the 2% buffer.  As MPC commented, it is too high.  Or perhaps an regional approach.  The impact of the B20 stress test (20% or more down payment) in January 2018 has negatively affected most markets, not just the problem markets of Vancouver and Toronto.
  3. I am very disappointed in that one of the restrictions the stress tests places on home owners does not appear to be under consideration.  Under the current programs when you go to refinance your mortgage, if you do it with your current bank, the stress test does not apply.  If you change banks, you must qualify under the stress tests.   Depending on changes to your situation, or the housing market, this could limit your ability to shop around for a better rate or move from a bank you are not satisfied with.  This also does not encourage your current bank to be competitive when you are renewing your mortgage.  This favours the banks, not the home owner.


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