Ottawa and a federal banking regulator are planning to introduce changes to the mortgage stress tests by April, a move which could make it potentially easier for would-be homebuyers to get mortgages.
Finance Minister Bill Morneau and the Office of the Superintendent of Financial Institutions announced Tuesday that the minimum qualifying rate for home loans that are insured and uninsured against borrowers defaulting on their payments would be affected by the coming tweaks.
The changes, which will take effect on April 6, are aimed at adjusting the benchmark rate, or “floor,” that is used for the stress test to ensure borrowers can continue to repay their loans if there is a change in conditions, such as an increase in interest rates. Following a review, both the federal government and OSFI said the floor had fallen out of step with actual housing market conditions, and will now be adjusted.
“The spread between actual contract rates and the current benchmark rate has widened recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed,” OSFI said in an industry notice on Tuesday. “The new benchmark rate would replace the five-year conventional rate, and would be more representative of the broader market and responsive to fluctuations in actual contract rates.”
Currently, the benchmark for the tests is published by the Bank of Canada, based off the posted five-year conventional mortgage rates that are offered by the country’s six biggest banks. The new benchmark for the tests will be a weekly, five-year rate calculated by the Bank of Canada and based on mortgage insurance applications, plus another two percentage points.
The stress tests, especially for uninsured home loans, have also irked the real estate industry, which has argued that would-be homebuyers are being sidelined.
The government will continue to monitor the housing market and make changes as appropriate, Morneau said in a press release. Reviewing the stress test ensures it is responsive to market conditions.
Morneau’s ministry is responsible for the minimum qualifying rate for insured mortgages, while a stress test for uninsured home loans is the jurisdiction of OSFI.
Mortgage-default insurance is required when borrowers make a down payment of 20 per cent or less on a home’s purchase price. The minimum qualifying rate for insured mortgages will now be either the new benchmark, or the rate on the borrower’s contract — whichever is greater.
OSFI’s current minimum qualifying rate for uninsured home loans is the Bank of Canada’s five-year benchmark rate or the contractual rate plus two percentage points, again, whichever is higher. OSFI said Tuesday that it is only considering replacing the benchmark rate.
Financial Post
Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne