New Benchmark Rate for Qualifying Insured Mortgages

CHBA has been calling on the Federal government to make changes to the stress test to lessen its impact and make it more reflective of market conditions since its inception.

The cumulative effects of mortgage rule changes, over 60 since 2008, have surpassed the original policy goals, to the detriment of first-time buyers and local economies. This change to the stress test for insured mortgages is a step in the right direction. That said, more adjustments to mortgage rules, including the stress test, can and should still be made to support affordability and first-time buyers; and these can be made without adding undue risk to the financial system or excessive price escalation.

• The stress test, introduced in 2016 for insured mortgages, then 2018 for uninsured mortgages, shut the door on 147,000 Canadians—half of whom would have been first-time buyers who dreamed of homeownership—stalling movement along the housing continuum and also contributing to rent escalation and low vacancy rates.
• The stress test also pushed many Canadians into the unregulated mortgage market, which saw a rise in mortgage originations by a cumulative 27% while originations in the market as a whole fell by 11%1, increasing systemic risk and mortgage rates and debt loads for those buyers.
• The Minister of Finance’s announcement of the change to the insured-mortgage stress-test benchmark rate (or minimum floor rate)—from the Bank of Canada 5-Year Benchmark Posted Rate to a weekly median 5-year fixed insured mortgage rate plus a 2% buffer—is a step in the right direction, in that it signals federal recognition that a more responsive measure is needed. OSFI is expected to do the same for insured mortgages.
• The change will make the stress test more dynamic, bringing the rate at which the borrower is “stress tested” more in line with actual mortgage market conditions. At current rates, it is estimated it will increase borrower buying power by about 5%.
• Based on early calculations, and current market conditions, CHBA expects that this change has the potential to bring a portion of the previously locked-out buyers back into the market. CHBA initial estimates suggest that approximately 20,000 well-qualified buyers could be returned to the market, assuming a test rate of about 4.85%.
• While this change is a step in the right direction and CHBA is still assessing the potential impact, there is still more that can be done.
• CHBA continues to recommend that the stress test (for both insured and uninsured mortgages) also be modified to reduce the test rate on a declining basis down from 2% for 5, 7 and 10 year mortgage terms, given the reduction in risk with longer mortgage terms for both Canadians and the financial system, as encouraged by the Bank of Canada.
• CHBA also still recommends a return to 30-year amortization periods for first-time buyers. Such changes would go further support well-qualified home buyers access homeownership while strengthening the economy and the Canadian financial system.