the rennie brief - stress test changes (february 2020)

MORTGAGE STRESS TEST

WHAT YOU NEED TO KNOW ABOUT CHANGES TO CANADA’S MORTGAGE STRESS TEST • The new minimum qualifying rate for insured mortgages will be the weekly median five-year fixed contract mortgage rate plus 200 basis points. • This new, median rate would currently be in the range of 4.89%—lower than the Bank of Canada’s benchmark rate of 5.19% that is currently being used in the stress test. • For a household earning $95,000, this change will yield an increase in purchasing power of 2.7% (adding $12,100 to this household’s maximum purchase price) • As the new median rate will move with market interest rates, this change could result in further increases in home purchasing power if fixed mortgage rates continue to fall.

the rennie brief

FEBRUARY 2020

Effective 6 April 2020, the federal government is changing the stress test for insured mortgages. The new minimum qualifying rate will be the weekly median five-year fixed contract mortgage rate plus 200 basis points, increasing buying power by 2.7% for impacted borrowers.

HISTORY OF THE MORTGAGE STRESS TEST Since 2016, Canada’s federal government and the Office of the Superintendent of Financial Institutions (OSFI) have required that a “stress test” be applied to all insured mortgage applications. To this point in time, the rules have required borrowers to qualify at the greater of their contract rate plus 200 basis points (that is, plus two percentage points) or the Bank of Canada’s five-year benchmark mortgage rate. In 2018, OSFI adopted similar guidelines for uninsured mortgages. At the time of their introduction, these more restrictive mortgage underwriting practices were viewed as an important buffer for consumers against rising lending rates, thereby reducing risks for Canada’s financial system. WHY THE CHANGE IN 2020? While the stress test was intended to buffer against rising rates, fixed mortgage rates have actually moved downwards since 2018 due to reductions in longer-term bond yields, themselves the consequence of slower (and more uncertain) patterns of global economic growth. Despite these recent declines in mortgage rates, the Bank of Canada’s benchmark rate has remained stubbornly consistent, which in turn has had the effect of making the stress test increasingly restrictive over time. For example, while the Bank of Canada’s benchmark rate has only inched down from 5.34% to 5.19% over the past two years, discounted five-year fixed mortgage rates have fallen from in the neighbourhood of 3.64% to 2.89% over the same period.

WHAT THE LATEST CHANGE MEANS Effective April 6th, the new minimum qualifying rate for insured mortgages will be the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 200 basis points. As such, the Bank of Canada’s benchmark rate will no longer factor into the stress test parameters governing insured mortgages. Canada’s Ministry of Finance has indicated that the new, median weekly rate would currently be in the range of 4.89%, or 30 basis points below the Bank of Canada’s benchmark rate. So, rather than having to qualify for a mortgage at 5.19%, insured borrowers would have to qualify at 4.89%. In working through the mortgage calculation, a household with a $95,000 income would be able to qualify for a mortgage of almost $399,000 under the old rules and, with a 10% down payment, could afford a home worth approximately $443,000. The new rules would see this mortgage amount increase to $411,000 and, with the same down payment, this household could buy a home worth up to $455,000. Therefore, the overall result would be a 2.7% increase in purchasing power for this household, equivalent to the ability to borrow an additional $12,100, as a result of the modified stress test. WHAT HAS NOT CHANGED At this time, these changes only apply to insured mortgages, or borrowers with less than a 20% down payment. It is worth noting that the overall impact of this change on the entire market is likely to be small, as insured mortgages represent only about one-third of all outstanding mortgages in Canada. OSFI is currently consulting on the potential implications of adopting these same changes for uninsured mortgages, with a decision likely to come in early April 2020.

For further information please contact Ryan Berlin (rberlin@rennie.com) or Andrew Ramlo (aramlo@rennie.com). The information set out herein (the “Information”) is intended for informational purposes only. RAR & RMS has not verified the information and does not represent, warrant or guarantee the accuracy, correctness and completeness of the information. RAR & RMS does not assume any responsibility or liability of any kind in connection with the information and the recipient’s reliance upon the information. The recipient of the information should take steps as the recipient may deem necessary to verify the information prior to placing any reliance upon the information. The information may change any time without notice or obligation to the recipient from RAR & RMS.

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