Becoming a homeowner in Canada just got a bit easier now that the rate used to stress test mortgages has fallen for the first time in over three years.
The Bank of Canada lowered the five-year fixed rate to 5.19 per cent from 5.34 per cent in the first downward move since September 2016.
The “stress test rate” or “mortgage qualifying rate” is used by federally regulated lenders to gauge theoretical mortgage payments. Applicants must then prove they can shoulder the payments without exceeding the lender’s standard debt-ratio.
The Bank of Canada's five-year benchmark rate is calculated using the posted rates at the big six banks.
RateSpy describes the move as an “incremental psychological boost for buyers that adds a modicum more support for home prices.”
Assuming no other debt and a 25-year amortization period, a borrower buying a home with five per cent down making $50,000 a year can afford $2,800 (1.3 per cent) more home. Someone making $100,000 a year can afford $5,900 (1.3 per cent) more property.
Assuming no other debt and a 30-year amortization period, a borrower buying a home with 20 per cent down making $50,000 a year can afford $4,000 (1.4 per cent) more home. Someone making $100,000 a year can afford $8,300 (1.4 per cent) more home.
Mortgage brokers and lenders have complained that the federal government’s tighter lending rules brought in January 2018 to guard against unqualified buyers entering the housing market have had an adverse impact on their business.
A report released earlier this month by the Canada Mortgage and Housing Corporation (CMHC) found mortgage growth slowed to the weakest rate in more than 25 years in 2018. The decline in insured mortgage originations has been a win for alternative lenders.
The CMHC report notes uninsured mortgage loan originations with values of $500,000 or more accounted for 35 per cent of the 2018 total, up from 29 per cent in 2016.
RateSpy expects the decrease in the five-year fixed rate will “counter in some small part” the slow lending tend.