The Bank of Canada this week announced that changes to the benchmark qualifying rate, commonly known as the “stress test” will be coming and effective as of April 6th of this year.
The Stress Test is a measure implemented by the Office of the Superintendent of Financial Institutions to ensure home purchasers are able to fulfill their commitments throughout the term of the mortgage despite possible rate increases.
To date, this has been done by requiring the consumer to gain approval at the higher of (a) the big banks’ posted 5-year fixed mortgage rate or (b) their negotiated rate +2%. In the great majority of cases, this was the 5-year fixed mortgage rate.
As of April 6th, 2020, the stress test will now not be affiliated with the posted rates. The new benchmark qualifying rate will be determined weekly by finding the median 5-year mortgage rate for all mortgage applications and adding 2%. For example today you can find 2.29 and 2.34 at two big banks. The benchmark rate based upon these two rates would, therefore, be 2.313% + 2%.
This will come as welcome news to many buyers seeking a mortgage pre-approval as it will positively impact their purchasing power by an estimated 7% to 9%.
The change will initially only apply to “insured'' mortgages which are mortgages greater than 80% of the property value.