Top Stories

Bank regulator raises mortgage stress test level, making it harder to qualify for home loan

Canada’s top banking regulator is raising the mortgage stress test level to 5.25 per cent or two percentage points above the market rate, whichever is higher.

That’s a hike from 4.79 per cent, which is the current average posted rate at Canada’s biggest lenders.

Thursday’s change by the Office of the Superintendent of Financial Institutions (OSFI) means borrowers will need to prove that their finances can pay for the loan at that higher rate, regardless of what a lender is willing to lend them. This would make it harder to qualify for a home loan, shrinking the pool of qualified borrowers and ultimately bringing down some of the upward pressure on house prices in the country.

OSFI says the new rules will be in place as of June 1.

Known colloquially as the “stress test,” the rules came into force in early 2018 and had the effect of cooling down what was at the time an overheated property market — although after they were announced in late 2017, there was a flurry of last-minute buying by people trying to get in before they would be locked out of buying.

Once they were in place in early 2018, the frenzy died down.

While there are a number of different facets to the rules, officially known as the B-20 Guidelines, they boil down to essentially one principle: would-be home buyers would have their finances tested to see if they could cover their mortgage payments should rates rise much higher than they were at the time they signed up for the mortgage.

The testing bar was set at whatever was higher: two percentage points over the mortgage rate they were offered, or whatever the average five-year posted fixed rate is at Canada’s big banks. 

Functionally, that five-year average rate has been the bar that most uninsured borrowers have been asked to meet, since market rates have been much lower than two percentage points below that level for almost the entire period of the stress test’s existence.

A look at the numbers

Currently, the average posted five-year big bank mortgage rate is 4.79 per cent, but it’s not difficult to find a loan at about half that rate, a little over two per cent, by shopping around.

A look at the numbers shows how easy it is to get in over your head.

At two per cent, a 25-year mortgage of $300,000 would cost $1,270 a month. But if rates were to rise to 4.79 per cent, where the big bank posted rates already are, that monthly payment goes up by almost $500 a month, to $1,709.

That’s an increase of almost 35 per cent to a borrower’s monthly budget. 

At 5.25 per cent, the new stress test rate, the monthly payment would jump to $1,788 a month.

If the numbers show that a borrower’s finances wouldn’t be able to withstand a significant rate hike, the borrower fails the stress test, and a lender isn’t allowed to lend them money. 

COVID-19 changed the plan

The banking regulator was looking into perhaps setting some other sort of benchmark for the stress test prior to COVID-19, but the pandemic shelved those plans.

In addition to the higher rate, OSFI also says it plans to “revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment.”

The move by OSFI comes as the average price of a Canadian home rose by 25 per cent in the year up until the end of February.

That’s prompted a flurry of calls for policymakers to step in again to make sure borrowers aren’t getting in over their heads.


Source link

bourbiza

Bourbiza Mohamed. Writer and Political Discourse Analysis.

Related Articles

Leave a Reply

Back to top button