Canada’s main banking regulator is raising the mortgage stress test level to 5.25% or two percentage points above the market rate, whichever is greater.
This is an increase of 4.79%, the average rate currently posted by the largest lenders in Canada.
Thursday’s change by the Office of the Superintendent of Financial Institutions (OSFI) means borrowers will have to prove that their finances can repay the loan at that higher rate, no matter what a lender is willing to lend them. This would make it more difficult to qualify for a home loan, which would reduce the pool of qualified borrowers and ultimately reduce 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 took effect in early 2018 and had the effect of chilling what was then an overheated real estate market – albeit after their announcement in late 2017. There has been a flurry of last-minute buying by people trying to get in before they are excluded from buying.
Once in place in early 2018, the frenzy subsided.
While there are a number of different facets to the rules, officially known as the B-20 guidelines, they basically boil down to one principle: Potential homebuyers would have their finances tested to see if they are. they could cover their mortgage payments if the rates go up much more than when they took out the mortgage.
The test bar was set at whatever was higher: two percentage points of the mortgage rate offered to them, or whatever the five-year average fixed rate posted at major Canadian banks.
Functionally, this five-year average rate has been the bar that most uninsured borrowers have been urged to meet, as market rates have been well below two percentage points below that level for most of the time. the period of existence of the stress test.
A look at the numbers
Right now, the average five-year mortgage rate for major banks is 4.79%, but it’s not difficult to find a loan at about half that rate, just over 2%, in doing the tour.
A look at the numbers shows how easy it is to go overhead.
At 2%, a 25-year mortgage of $ 300,000 would cost $ 1,270 per month. But if rates rise to 4.79%, where the big bank already posts rates, that monthly payment will increase by almost $ 500 per month, to $ 1,709.
That’s a nearly 35% increase in a borrower’s monthly budget.
At 5.25%, the new stress test rate, the monthly payment would increase to $ 1,788 per month.
If the numbers show that a borrower’s finances could not withstand a significant rate hike, the borrower fails the stress test and a lender is not allowed to lend them money.
COVID-19 changed the plan
The banking regulator may have been considering setting another sort of benchmark for stress testing before COVID-19, but the pandemic has put those plans on hold.
In addition to the higher rate, OSFI also says it plans to “review the calibration of the allowable rate at least annually to ensure that it remains appropriate for risks in the environment.”
OSFI’s move comes as the average price of a Canadian home rose 25 percent during the year through the end of February.
This sparked a wave of calls for policymakers to step in again to make sure borrowers don’t get over their heads.