In January 2018, the OFSI mortgage stress test (B-20) was introduced to test a homebuyer's ability to afford their property in the event of an interest rate increase. Before then, the stress test existed only for highratio mortgages – anyone borrowing more than 80 per cent. However, the new B-20 rules made the stress test applicable to all mortgages in Canada.
Under this stress test, Canadians are no longer qualifying for the value of the home they are purchasing, but instead, the greater of the Bank of Canada's (BoC) five-year rate or the rate offered by their mortgage lender, plus two per cent. Consequently, this made the new process of qualifying for a mortgage a lot tougher, especially for first-time buyers.
Back in June 2018, the benchmark qualifying rate for the stress test was 5.34 per cent. After three rate drops from the BoC this year, it now sits at 4.79 per cent. This significant drop from 2018 has increased the overall home affordability of Canadian borrowers and thus made the stress test a little easier.
Why does the rate drop help with affordability?
A major pain point with the previous stress test was that its strict guidelines made affordability more difficult for borrowers. With the qualifying rate lowered to 4.79 per cent, this increases the amount of money homeowners and buyers can borrow and also expand their horizons in terms of what they can purchase.
For example, let's say a young couple is looking to buy their first home. Their household income is $124,000 and they're willing to make a down payment of five per cent on a $523,000 home. Under the previous stress test, this couple could get approved for a mortgage of $516,724. However, today they could get approved for a mortgage of $543,400 on a $550,000 home. From June 2018 to now, their home affordability increased by $27,000.
How will this help Canadian buyers and homeowners?
When the stress test was first put in place, many first-time buyers were impacted, as it reduced their home affordability. With the qualifying rate lowered to 4.79 per cent, the marketplace is much more inviting for those who have been anticipating the opportunity to purchase their first home.
For those who want to renew or switch their mortgage, the new stress test gives them more opportunity to explore better options outside of their current lender. Under the previous test, many homeowners looking to renew their mortgage could do so only with their existing lender as they wouldn't be subject to the stress test. Today, this process is a lot more flexible and lenient to homeowners interested in shopping different lenders for a better mortgage. For individuals looking to refinance, the new stress test rate is positive, as it increases their overall affordability and the total amount they can borrow on top of their current mortgage.
The consistent rate drops over the last six months are a direct response to the recent pandemic and the federal government's efforts to stimulate the Canadian marketplace. With the stress test rate lowered, there's been a clear spike in buying activity across Canada. At Homewise, we've seen this first-hand with a strong influx of clients looking to refinance or switch their mortgage, or purchase their first home. Working with more than 30 banks and lenders, we make it possible for clients to shop around and find the best product for their unique circumstances. With all that said, the current marketplace is buzzing and presents more opportunities for both existing homeowners and prospective buyers.
Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto. thinkhomewise.com