Homebuyers, take note: Canada's mortgage stress test rate is changing in April

The federal government is changing the stress test rate for insured mortgages starting April 6 that experts say should make it marginally easier for some buyers to purchase their first home, or owners refinancing their existing mortgages.

This new stress rate is going to have some big changes, these changes will affect people all over Canada. The new minimum qualifying rate will be the greater of the borrower's contract rate, or it would be the weekly median five-year fixed insurance mortgage rate from mortgage insurance applications, plus two percentage points.

If you are currently unaware on what the stress test rate is currently, it currently is the greater of the borrower's contract rate or the Bank of Canada five-year benchmark posted mortgage rate, which is based on the posted rates at the six largest banks.

The Finance Minister Bill Morneau has unveiled the change; by saying the stress test will rise and fall if there are changes in the median interest rates lenders are providing, however Morneau is still continuing to ensure people only take on mortgages that they are capable of affording.

"We think these are positive moves to ensure that the approach remains effective for Canadians and that it also deals with changing market conditions," Morneau said Tuesday in announcing the change.

Canadian household debt has lately been nearing record levels, therefore in 2016, the federal government had made it mandatory to apply for a stress test to all insured mortgages, the point of the stress test is to ensure that Canadians can afford their mortgage payments in the future, even if the interest rates end up rising.

The test, then, didn't adjust to recent drops in lending interest rates and became too tight, Sherry Cooper, chief economist of Dominion Lending Centres wrote in a note.

"With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years," she wrote.

Looking at statistics:

The Bank of Canada's five-year benchmark posted mortgage rate is currently 5.19 per cent.

However the special offer rate which is advertised on the Royal Bank's website for a five-year fixed-rate is 3.09 per cent.

However some rates that are offered by smaller lenders are even lower.

This change to the stress tests will most likely end up making qualifying substantially easier for some buyers, said Paul Taylor, president of Mortgage Professionals Canada.

"Having a stress-test at 200 basis points to prepare people for a potentially more expensive renewal just doesn't seem practical," Taylor said in an interview.

"If you really want to prepare people for a two-per-cent increase in interest rates, then a 75 basis point test today will do that."

If you would like to learn more about the new stress tests that are soon going to be active, or if you are thinking about buying or selling your properties, please contact Matt Gul, who is a top luxury real estate agent situated in West Vancouver, who can help you with all of your needs. To contact Matt Gul please call him at 778.888.8888 or email him at matt@mattgul.com

Summarized by: Onur Gul on instagram at @onurgulfilm