The interest rate used in Canada’s mortgage stress tests has fallen for the first time since 2016, making it slightly easier to become a homeowner.
The mortgage qualifying rate dropped to 5.19 per cent from 5.34 per cent, where it had been locked since May of 2018, according to new figures from the Bank of Canada. The rate is derived from the most frequently occurring five-year, fixed posted rates at Canada’s Big Six banks. (Market rates are much lower, and some discount lenders offer five-year fixed rates as low as 2.47 per cent.)
The qualifying rate had increased several times during 2017 and 2018 as the Bank of Canada raised its key interest rate, and as bond yields headed higher.
But there’s been a notable shift in lending conditions as many central banks across the globe look to ease policies. Moreover, Canada’s five-year bond yield, which influences the direction of five-year fixed-rate mortgages, has tumbled this year. As a result, those mortgage rates have plunged roughly 70 basis points, according to a recent research note from BMO Nesbitt Burns.
The stress tests are used to ensure homeowners and prospective buyers could continue to afford their mortgage payments at higher interest rates, and apply only to federally regulated lenders. The Department of Finance first imposed a stress test on insured buyers, or those who typically make a down payment of less than 20 per cent of the home’s purchase price, starting in the fall of 2016. Canada’s banking regulator followed suit with a similar test on uninsured buyers, which went into effect in 2018.
The second test is widely credited as one of the factors that has weighed on resale activity in Canada’s real estate market.
The new qualifying rate will have a tangible impact on a home buyer’s purchasing power. For someone making a 20-per-cent down payment, and who earns $50,000 a year, the lower rate will allow them to afford a home that is roughly $4,000 more expensive, according to calculations from RateSpy.com. For those earning $100,000 a year, with the same down payment, they can buy a home about $8,300 pricier. (RateSpy assumes no other debts and a 30-year amortization.)