Stress test gets more stressful

May 19 2018

The federal mortgage stress test being applied to all new homebuyers became more stressful this month after an increase in the bellwether five-year mortgage rate. This is the rate that mortgage seekers must qualify at, regardless of the amount of their down payment.
The interest rate used by the Bank of Canada for the mortgage stress test has increased to 5.34 per cent from 5.14 per cent.
The central bank's rate is based on a survey of conventional five-year rates available at the big banks.
"The change in the Bank of Canada five-year benchmark rate not only means Canadians will pay more per month for their mortgage, it also means the amount Canadians can qualify for has diminished," James Laird, co-founder of Ratehub Inc. and president of CanWise Financial, said in a release.
"This increase will put pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market," he said.
The test is based on attaining the greater of either the Bank of Canada qualifying rate or the buyer's contracted interest rate plus two percentage points.
Buyers do not have to actually pay the higher rates; they just need to prove they can. Once they qualify, homebuyers can acquire a mortgage in a competitive market that is offering five-year variable closed rates at below 3 per cent. TD Bank this week was even offering a six-year fixed mortgage rate at 3.77 per cent to qualified borrowers.