This week the federal government announced that it is changing the mortgage stress test and making it a whole lot easier to pass.
Finance Minister Bill Morneau’s office announced that it’s changing how it calculates the rate used for the stress test as of April 6 of this year. Once the new calculation kicks in, the rate used in the test will drop to 4.89 per cent, from 5.19 per cent (current BoC’s posted rate).
This will make it easier for a new buying power for borrowers of insured mortgages by about 3 per cent. A household earning $100,000 a year would be able to afford a mortgage of around $526,000 under the new rules, compared to around $511,000 under the current rules, according to calculations from mortgage comparison site Ratehub.
Canada’s federal banking regulator, OSFI, also announced it’s considering making the same change to the stress test for uninsured mortgages.
But critics wonder if these changes will actually help homebuyers who are impacted by affordability.
The average resale price of a house in Canada jumped 11.2 per cent in January, compared to a year earlier, especially in Vancouver and Toronto, two of the markets with the highest demand for all kinds of housing. With prices rising quickly once again, many sellers appear to have decided to pull their homes off the market for better prices in the spring, further pushing up prices.
The current stress test uses the Bank of Canada’s posted rate, which is an average of the official rates at Canada’s major national banks. That rate typically has been two percentage points higher than the “discount” rates banks actually offer borrowers.
But last year, when offered rates dropped, the official ones didn’t ? so the gap between offered rates and the rate used in the stress test grew, and the test in some cases now adds as much as 2.75 percentage points to a mortgage rate.
The new test will base its numbers on mortgage rates listed in insurance applications.
How all this helps alleviate the housing crisis in big Canadian cities in particular remains to be seen. It could end up simply driving up prices again.