The federal government has announced changes to the mortgage stress test for the first time since its introduction in January 2018. The changes will see home buyers around the country have more buying power, benefiting all those looking to purchase a home in the coming months – especially first-time buyers. Here’s what you need to know about the mortgage stress test and how it’s affected by the recently announced changes.
All about the mortgage stress test
The mortgage stress test was implemented throughout Canada in January 2018, marking the seventh time since 2008 that new mortgage rules have been adopted. The stress test requires that Canadians looking to purchase real estate be able to pay for the higher of two percent above the actual mortgage rate, or the average five-year posted rate calculated by the Bank of Canada. The rules were implemented to ensure that Canadian homeowners don’t bite off more than they can chew when looking to buy a home, especially in the even that they are faced with higher interest rates or decreased income.
In the eyes of many, the rules spelled trouble for first-time homeowners, making it necessary that some buyers lower their standards and purchase a less expensive home. A market analysis from January 2018 suggested that nearly 10% of Canadians who had been approved for uninsured mortgages in the year prior would fail the new mortgage stress test guidelines. In the year following the implementation of the stress test, home sales in Canada softened.
Changes announced by the Bank of Canada
On July 19, the Bank of Canada announced that they would be lowering the bar for the mortgage stress test for the first time since it was implemented. The five-year benchmark qualifying rate will be lowered from 5.34 per cent to 5.19 per cent – the first decrease since September 2016, when it dropped from 4.74 per cent to 4.64 per cent. Since those changes nearly three years ago, the rate has increased at a steady rate. The last change to the qualifying rate came in May 2018, when it was raised to 5.34 per cent. The lowered rate comes as a result of the bond market signalling that it expects cheaper lending rates in the near future.
What these changes mean for Canadian home buyers
While the rate decrease isn’t a major move, it’ll go a long way in increasing the buying power of Canadian home buyers, and instilling confidence in their buying decision. Samantha Brookes, chief executive officer of Mortgages of Canada, issued a statement to the press saying “This 15 basis point drop in the qualifying rate will not turn the housing market around in the hardest-hit regions, but it will be an incremental positive psychological boost for buyers” and that “it should also counter, in some small part, what’s been the slowest lending growth in five years”.
The reduced qualifying rate will allow homeowners to consider purchasing slightly more expensive property, rather than shackling them to a limited amount of choices. It’s estimated that home buyers will now be able to afford a home 1.4 per cent higher than they previously could. The existence of the mortgage stress test will still limit the options of first-time home buyers, discouraging them from buying property because of its limitations, as well as the possibility of failing the test.
For more information about the property management and realty services offered by the experienced team at Highgate Properties, contact us today.