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You may or may not have heard that the federal government created a new and improved stress-test, effective April 6th 2020. Of course, if the government created it, it’s way more convoluted than it needs to be but I digress.
So – in a nutshell, what’s going on?
The Government of Canada introduced two measures last year when announcing their platform on how to help first-time buyers. That was the two-part “shared equity program”. The first part was for all of Canada, and then another increased plan came out for the Greater Toronto and Greater Vancouver. Since that program has really not taken off, the Government has had some pressure to create a new stress-test.
To recap: In October 2016 the Government announced that every buyer with 5-19% down payment has to qualify at the “Bank of Canada Benchmark Rate” (today 5.19%) OR 2% higher than the 5-year fixed rate. The problem is, only once since then did the +2% rate take effect. Simply – the stress-test has been a big fail. It has curbed the market (until recently), but it did not ever reach the 5.19% rate. So why bother?
Now, the NEW and IMPROVED stress-test is (and excuse me if this sounds really complicated): the average of the last 4 weeks 5-year fixed-rate PLUS 2%. In today’s interest-rate environment this means that the stress-test qualifying rate is actually lower and you can qualify for more under this new regime. How much more? Estimates range from 3-8% depending on who you ask.
Okaaaaay, and when is the new 2020 mortgage stress test effective?
April 6th 2020. The lenders will have to use a 4-week average rate to qualify all borrowers starting then.
Why didn’t the Government just make this easier?
They had to do something. They were under a lot of pressure from all groups; builders, bank lobbyists, REALTOR groups, mortgage brokers etc., even the public. The problem is, they didn’t make it that much easier. They basically said: “Look! We did SOMETHING! Ta-dah!”. But that something isn’t going to help many Toronto Buyers, maybe just 1%.
Why will so few Toronto Buyers be impacted by the 2020 stress test?
Most Buyers in Toronto already have more than the minimum down payment. Most Buyers also qualify for more property and mortgage because incomes in Toronto are, on average, higher. This WILL help the 905 and 705/519 regions in Ontario though. 3-8% more in buying power CAN go a long way in those markets.
So what about Buyers who have 20% down or more?
Buyers with a downpayment of 20% or more don’t have any stress-relief… yet! Rumours are that the stress test for those Buyers will also change sometime soon and they are taking “recommendations” until March 17th to see what some people propose. I don’t want to speculate, or wish, but I do have some ideas that’ll really REALLY explode the market.
And that’s another problem: The test changes came at a time where a literal tsunami hit Toronto Real Estate. The last 6 weeks have been without any notion of reality. This might mean the 20%+ downpayment Buyers will not see a major change at all but I’d be really unimpressed if the Government and OSFI (the superpower that regulates 20%+ down borrowers) were to make a knee-jerk reaction because of the recent market activity…but you never know.
So there you have it. The 2020 mortgage stress-test changes and a sign of things to come. Thanks Jake!
