6 Things To Know About The Mortgage Stress Test Changes
Monday Dec 30th, 2019
The federal government has announced changes to the mortgage stress test in a bid to make people qualify for a mortgage easier. The new scheme will be applicable from April 6, 2020. The experts believe that the noticeable changes will influence the choices of first-time buyers and owners, who are planning to refinance their existing mortgages.
WHAT EXACTLY IS CHANGING
Presently, individuals who are getting insured mortgages must prove they can make a payment, comprised of the benchmark - five-year posted rate. This rate is calculated from the typical big-bank rates by The Bank of Canada, and it’s currently 5.19 per cent. From April 6, 2020, a new and better benchmark will be implemented. It’ll be grounded on the country’s median five-year fixed insured-mortgage rate, plus two percentage points.
If that rate were applicable today, it would be around 4.89 per cent. That’s like 30 basis points less than the current (minimum) stress-test rate.
If you are wondering whether any of this will matter or not, here are six reasons why it does.
1 - The stress test is no longer determined by the biggest banks
Before this, the Big Six banks decided the benchmark rate, which currently serves as the least stress-test rate. Officials have realized that’s not a good idea, which is why amendments took place. For more than a year, banks have denied cutting their posted five-year rates to decrease this all-important qualifying rate. That kept the stress test needlessly problematic – thousands of borrowers failed to qualify for the best mortgage, while others couldn’t qualify at all.
2 - It is economically beneficial
Banks barred the stress test from adapting to lower economic growth expectations with the high posted rates. This new benchmark rate is more flexible, which would allow more people to qualify for a mortgage. It will boost the housing-dependent economy when needed most.
3 - It’ll heat up home prices
The rates will be the same by April, chances are there will be a 30-bps reduction in the stress test. It would result in upward of 3 per cent, even more, buying power. Although the home prices won’t be shooting the moon, it will be higher than the current ones.
By now, the national average home price is up 11.2 per cent in the past year. This news creates clearly bullish market psychology, particularly heading into the high season for home buying.
4 - Not the right time
Unarguably, there is never a bad time to turn wrong into right, and the stress test needed fixation. However, we are entering into a spring market with bidding wars in big markets, housing supply shortages, and falling rates. This change could cause even more housing imbalances and over-indebtedness. Therefore, it would have been ideal for making changes in the stress test by the summer season.
But again, home prices are unpredictable, and regulators may have something else up their sleeves to counterbalance the simulative effect of this change. The government is mainly focusing on the resurgence in borrowers with high loan-to-income ratios. More credit-tightening could ultimately be on the way, mainly if home prices keep soaring.
5 - The new benchmark is useful for rate shoppers
For the very first time, the government has taken the initiative to publish median market-wide insured-mortgage rates. Insured mortgagors can use that detail to speedily match the price they’re being offered with the rates other people are getting. As a result, there will be fewer lenders getting away with quoting lesser rates.
6 - Expect more rate-timing
If you have high debt ratios, you are lucky to live in ‘easier stress test’ times. With an objective and responsive stress-test rate, there is a possibility to see more borrowers – those who almost qualify for a mortgage – trying to time rates. Folks whose debt ratios are too high under the then-current stress-test rate might defer their mortgage application until prices fall “enough.”
On the contrary, some people could be caught waiting longer than expected if rates unpredictably jump. The moral for those considering this strategy: Don’t try rate-timing.
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