Canada’s Mortgage Stress Test Just Got Easier

As has been widely anticipated over the past few months, changes have arrived for Canada’s mortgage stress test. The Canadian department of finance has changed the way insured mortgages will be stress tested, and it sounds like OSFI will follow suit with uninsured mortgages as well. Under the current stress test, borrowers had to qualify at the greater of the Borrower’s Contract Rate, which is the mortgage interest rate agreed to by the lending institution and the borrower, or the Bank of Canada 5-Year Benchmark Posted Mortgage Rate which currently sits at 5.19%. Over the past year we’ve seen a significant decline in bond yields, which has prompted a sharp decline in mortgage rates. However, the Bank of Canada 5-Year Benchmark Posted Mortgage Rate has remained relatively unchanged. In other words, today’s benchmark rate (currently 5.19%) is too high relative to actual mortgage rates. So, regulators are changing the benchmark rate. The new benchmark rate will be set using a weekly median 5-year fixed insured mortgage rate as calculated by the Bank of Canada from federally-backed mortgage insurance applications, plus an additional 200 basis points on top.

Based off that metric, the new Benchmark Rate would be roughly 4.89% today. This means the stress test hurdle was essentially lowered by 30bps, increasing purchasing power by about 3%. The new stress test will come into effect on April 06, 2020 and its expected OSFI will lower the bar for uninsured mortgages as well. In a press release, OSFI noted, “The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates.” Adding, “In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” While the change in the benchmark rate is certainly warranted the timing is perhaps less than ideal. The Canadian debt binge has been showing signs of over heating once again, with residential mortgage credit growing faster than it did prior to the introduction of the mortgage stress test several years ago. Meanwhile, national home prices are accelerating again, up 4.8% year-over-year in January as we head into the busier spring market. Party on!