As the new year settles in, there has been some changes made to the existing stress test that many homebuyers dreaded when buying their homes. How will these changes affect you? Are the effects positive, negative, and are they negligible?
What is changing to the Stress Test
On February 18, 2020, the Canadian Minister of Finance announced a change in the benchmark rate for the stress test, otherwise known as insured mortgages. Before going into details of this change, let’s examine the effective date. The change will reportedly be made on April 6, 2020, which is 4 full months into the new year.
So, what does it mean for there to be a change in the benchmark rate? The current benchmark rate pre-April 2020 is 5.19% for a normal mortgage and 3.09% for a fixed rate mortgage over 5 years. Smaller and private lenders may be able to offer lower rates than the above. With the new benchmark rate, instead of 5.19%, a new 4.89% will be applied.
What does this mean to me?
If you are a homebuyer looking to qualify for a mortgage, or would like to renew your mortgage, the effects can differ. Homebuyers, especially first-time home buyers, would have an incrementally easier time with the test but could potentially face more difficult renewal processes. Current homeowners looking to renew for better rates might be able to get a better plan, depending on their current situation.
How much does it help the average buyer?
With the renewal process aside, there’s no question the new formula for stress testing insured mortgages will help many buyers who are currently points away of being able to pass the stress test. Consider that the current stress test rate of 5.19% is a full 283 basis points higher than the lowest available insured mortgage rate on the market.
The new formula will narrow that gap by 30 basis points after April 6. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization.
Alternatively, it will allow those who can easily pass the stress test to purchase about 5% more home, as applicants can now qualify for more funds than before. If you have any questions about renewing your mortgage plan or are willing to get a second or third mortgage, please reach out to us at Leap Financial. We’re always happy to help.