The Bank of Canada uses a stress test to limit mortgages to those they think will be able to afford the home if interest rates went up or their incomes dropped. The five year benchmark rate used in the mortgage stress test is calculated by the Bank of Canada. It is based on the posted interest rates with the Big Six Banks.
The Bank of Canada has used the five year benchmark qualifying interest rate in their mortgage stress tests. That qualifying interest rate has dropped for the first time in three years. It dropped slightly from 5.34 percent to 5.19 percent. The last time they fell was in September 2016 when five year fixed mortgage rates fell from 4.74 percent to 4.64 percent. Rates then began to climb to recent highs that have only recently stalled.
Red Deer homeowners would see a slightly better return on their money if they refinanced their mortgage. The greater impact is on potential home buyers. Jodi Whalen of Whalen Mortgages says the lower interest rate used in stress tests increases the maximum mortgage they could receive by 1.4 percent. If you were putting 20 percent down on a house and earn 50,000 dollars a year, you could now buy a home worth 4000 dollars more.
Note that the mortgage stress test is used on both insured and uninsured mortgages, so this affects the entire housing market. Many don’t know that the government applied the mortgage stress test to uninsured mortgages at the start of 2018 in addition to any home purchase where you’re putting less than 20 percent down. After that, to quality for an uninsured home mortgage, you had to prove you could make the house payments at a qualifying rate two percentage points higher than the contracted mortgage rate or the benchmark rate.
This slight drop won’t cause a housing boom. It means that more people could afford to buy a home for the first time. This is why home sales slowly improved after the interest rate came down. What matters more is that the interest rates fell at all. If they fell another half point, then the housing market would start to take off.
What could fix the housing market? A return of the insured thirty year mortgage would be one solution. Easing mortgage stress test requirements or eliminating it altogether is another. General consumers would benefit from the elimination of mortgage stress tests when they want to renew their mortgage with another lender. Right now, this limits how many people can move their mortgage to another, cheaper lender. In fact, it traps many people in their current mortgage while denying them potential hundreds of dollars a month in savings that they could use to pay off other debt or prop up the Canadian economy. The chief executive of the CMHC defended the current, strict lending rules, so we shouldn’t expect any of these changes in the near-term. However, Red Deer residents can still consult with a mortgage broker to learn their options when their mortgage comes up for renewal. Whalen Mortgages also offers a variety of products to help home buyers afford their next home.