Changes Are Coming to the Mortgage Stress Test in 2020 in Canada
CHESTNUT PARK WEST'S 'STRESS TEST' PRIMER
Ever since 2016, all insured mortgages must qualify at a minimum rate or, in other words, pass a 'stress test'. The key difference between an insured mortgage and an uninsured mortgage is the initial amount you're able to put down on the purchase of a If you find yourself able to put down more than 20% of the purchase price immediately, you can carry on without seeking mortgage insurance . If, however, your down payment comes in at under 20% of the total purchase price, the government mandates that the balance of the mortgage must be backed by government-supported insurance.
This policy was introduced four years ago as the Canadian housing market started its current upward climb, in an effort to ensure that buyers - especially younger, first-time home buyers - would be able to continue servicing their mortgage in the event of a climb in interest rates without being forced to default on the loan.
In order to pass the current 'stress test', borrowers "must 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
- Bank of Canada's five-year Benchmark Posted Mortgage Rate, which is the mode of the posted five year conventional mortgage rates offered by the six largest banks
Starting on April 6th, these rules will To pass the stress test, home buyers will now need to qualify at the new benchmark rate, which will be the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.
In real terms, this change boosts purchasing power by an average of 5% for those home buyers who are proceeding with an insured mortgage. Looking at things another way, if you had been pre-approved by your bank for a home purchase of up to $450,000 under the current rules, that limit will be boosted up to $472,500 under the new rules. This gives first time home buyers a little more wiggle room to compete in a hot market where bidding wars are once again becoming the norm.
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