The federal government recently announced big changes to the mortgage stress test. The stress test was originally put in place back in January 2018, ensuring that borrowers would be able to sufficiently pay for their mortgage in the event that mortgage rates moved higher.
The controversial mortgage stress test was criticized for being too harsh towards first-time real estate buyers, as many claimed that they were unrealistic and blocked inexperienced and uninsured borrowers from buying a home. The soon to be revamped test will change the way the stress test is calculated for mortgages.
A history of the mortgage stress test
The mortgage stress test was originally implemented in January 2018, requiring prospective homebuyers to show that they would be able to pay for the higher of two percent above the actual mortgage rates, or the Bank of Canada’s average five-year posted rate. The test was put in place to ensure that homebuyers would be able to afford to pay for their mortgage in situations where interest rates raised or income was decreased.
Further changes were made in July 2019, when five-year benchmark qualifying rates were lowered from 5.34 percent to 5.19 percent. This marked a 15 basis point drop in the qualifying rate, allowing homebuyers to purchase slightly more expensive properties than they would’ve been able to under the initial stress test rules.
New mortgage stress test rules
The new mortgage stress test rules, which are set to go into effect on April 6th, 2020, will change the way the test is calculated for mortgages, theoretically making it easier for homebuyers to qualify for a mortgage. The new test will affect insured mortgages for homebuyers with less than a 20% down payment, and will require Canadians to pass the new bar of the weekly median five-year fixed insured mortgage rates plus two percent.
The new rules allow the mortgage stress test to adjust to the dynamic conditions of the real estate market, allowing for far more flexibility. This change reflects the fact that despite many of Canada’s banks having posted rates of over five percent, the majority of them offer far lower fixed mortgage rates that are often offered to prospective homebuyers. Similar rule changes are currently being discussed for uninsured mortgages, so investors with a down payment of 20% or more should keep an eye out for future announcements.
What this means for Toronto real estate investors
The more flexible 2020 mortgage stress test changes mean that more Canadians can qualify for a mortgage, allowing new homebuyers to once again get in on the action they were previously shut out of. The stress test will now better reflect the ebb and flow of the market, fixing one of the key aspects of the original test that most critics took umbrage with. As of April 2020, Toronto homebuyers will now be able to afford a higher mortgage than they would have qualified for under the 2018 stress test rules, meaning that you’re more likely to be able to afford the home of your dreams – just in time for the nearing spring selling season.
For more information about the property management and realty services offered by the experienced team at Highgate Properties, contact us today.