Bank Of Canada Lowers Rate Used For Mortgage Stress Tests

Following criticism from industry, the Bank of Canada has lowered the rate used by mortgage stress tests to determine whether would-be homeowners can qualify for a mortgage.

The central bank's five-year benchmark qualifying rate is now 5.19%, down from 5.34%. It's the first decrease in the five-year fixed mortgage rate since September 2016, when it dropped from 4.74% to 4.64%, and has increased steadily since.

The decrease in the qualifying rate will increase the buying power for mortgage borrowers by allowing them to afford up to 1.4% more home. Someone putting a 20% down payment on a home who makes $50,000 per year can now afford $4,000 more home.

The mortgage qualifying rate is used in stress tests for both insured and uninsured mortgages, and a lower rate means it is easier for borrowers to qualify. These stress tests require potential homebuyers to show they would still be able to make mortgage payments if faced with higher interest rates or less income.

Home sales softened last year after the federal government introduced new stress test rules for uninsured mortgages, or those with a down payment of more than 20%, and mortgage rates inched higher. As of Jan. 1, 2018, to qualify for an uninsured mortgage, borrowers needed to prove they could still make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the central bank's five-year benchmark rate.

Several industry associations, including the Ontario Real Estate Association, have called for less stringent mortgage rules, saying that policy changes are needed to counter a downward trend in home ownership.