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Ottawa announces changes to mortgage stress test for insured mortgages

Morneau says changes to mortgage stress test rate will respond to market conditions
WATCH: Morneau says changes to mortgage stress test rate will respond to market conditions

The federal government is changing the stress test rate for insured mortgages starting April 6.

The government says the change will allow the rate to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

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The new minimum qualifying rate will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two percentage points.

The stress test rate currently is the greater of the borrower’s contract rate or the Bank of Canada five-year benchmark posted mortgage rate, which is based on the posted rates at the six largest banks.

Finance Minister Bill Morneau says the government wanted to make the stress test more dynamic to market conditions.

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“We think these are positive moves to ensure that the approach remains effective for Canadians and that it also deals with changing market conditions,” the minister said.

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Money123: Fixed vs. variable mortgage rates

“I think what’s important for us to ensure is that we continue to protect people’s most important investment. This will ensure that people only take on mortgages that are appropriate for their situation.”

The federal government required the stress test apply to all insured mortgages in 2016.

Canadian household debt has been near record levels, fuelled in part by mortgages. The stress test is used to ensure that Canadians can afford their mortgage payments if interest rates rise in the future.

The government said the Bank of Canada five-year benchmark posted mortgage rate has typically been about two percentage points higher than the average five-year fixed contract rate for insured mortgages.

READ MORE: Could you pass the mortgage stress test? Here’s how to find out

However, it said that in recent years, that rate has not been as responsive to changes in the average mortgage contract rates.

The Bank of Canada five-year benchmark posted mortgage rate is currently 5.19 per cent, while the special offer rate advertised on the Royal Bank’s website for a five-year fixed-rate mortgage is 3.09 per cent and rates offered by smaller lenders are even lower.

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The central bank will publish the new benchmark rate every Wednesday, with the rate coming into effect the following Monday.

The Office of the Superintendent of Financial Institutions says it is also considering using the same new stress test rate for uninsured mortgages.

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Mortgage stress test contributes to a decline in BC home sales

OSFI has been using a minimum qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada.

OSFI, which is consulting with stakeholders, has proposed that it will also adopt the new benchmark rate on April 6 to coincide with the changes for insured mortgages.