Relax! Stress Test Gets Easier Starting April 6, 2020

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It FINALLY happened!

The federal government has modified the stress test. Previously, the interest rate used to qualify for a mortgage was set by the Bank of Canada by taking the average of the Big 6 Banks’ 5 year posted mortgage rate. Posted rates are much higher than the actual rates people pay. As of the writing of this post, the qualifying rate is 5.19%. For non-default insured mortgages, the qualifying rate is (currently) 5.19%, or the actual rate of the mortgage + 2%, whichever is greater.

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Beginning April 6, 2020, the qualifying rate for default insured mortgages will be “the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%“. Roughly speaking, default-insured 5 year fixed rates over the last week have been around 2.8% (for non-bank mortgages anyway), so the new qualifying rate could be something like 4.8%. That’s a HUGE difference from 5.19% and translates into 4-5% more house.

This is VERY good news. This now means that:

1. The qualifying rate is now more responsive to changes in interest rates. The last few months has seen significant decreases in rates, with no change to the qualifying rate.

2. The qualifying rate is now de-coupled from Big Bank posted mortgage rates. This was always a problem because it gave de facto regulatory control to non-government entities.

3. Home buyers will qualify more easily and for higher purchase prices in today’s rate environment. If interest rates start to creep over 3%, we could actually see a HIGHER qualifying rate, but going back to item #1, it isn’t all bad that the qualifying rate is more reflective of what’s actually happening in the real world.

It’s not necessarily ALL good news though. Here’s some challenges we see/questions we have:

1. Since the new qualifying rate changes weekly, this could will wreak havoc on pre-approved buyers who are home shopping. If the qualifying rate goes down – no problem. But if it goes up, and then goes up again the following week.. and then up again the following week… you get the picture? It will create a lot of work for lenders/mortgage brokers, and probably stress, frustration, and confusion for borrowers who won’t know what they qualify for anymore. Frequently moving goal posts are not ideal in such an important and financially significant process. Right now, pre-approved clients are qualified at whatever stress test rate was in effect when they got pre-approved. We assume this will remain the same… BUT

2. …does this mean, if the qualifying rate goes up, someone who gets pre-approved Friday could qualify for (tens of) thousands more than someone who gets pre-approved Monday? What’s the plan here, Bill? This isn’t THAT much different from how it works today, but we’re also not used to this rate possibly changing on a weekly basis.

3. Because the rate is now pegged to actual rates being paid by actual consumers, this means the rate could just as easily go up as it could go down much faster than before. The silver lining to the “old way” was that even if rates did creep up (as they did last fall), unless and until the banks changed their posted 5 year rates, the qualifying rate stayed the same.

Overall this is positive news – at least for today while rates are dropping!

Stay tuned here. We’ll keep you updated as the story develops (which it certainly will).

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