On June 1, Canada’s federal bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), raised the minimum qualifying rate for the mortgage stress test. The new rules will make it harder for borrowers applying for uninsured mortgages (those with a down payment of 20 percent or more) and insured mortgages (those with a down payment of less than 20 percent) to get a loan. Banks must now use the higher interest rate of either 5.25 percent (up from 4.79 percent) or the amount negotiated with the borrower’s lender plus two percent.
“The qualifying rate will help support financial resilience should economic circumstances change,” said Ben Gully, assistant superintendent of OSFI’s regulation sector, in a recent press release. “Our commitment to review the qualifying rate at least annually will contribute to continued confidence in the Canadian financial system.”
Who does the new mortgage stress-test rules impact?
To put it simply: Everyone. However, first-time homebuyers are more likely to be impacted by the new rules as they’re likely to have less equity than those already in the current housing market.
“It’s important to understand that the recent rapid increases in home prices are not normal,” said Tiff Macklem, the Bank of Canada governor, in a recent statement for the bank’s annual Financial System Review. “Some of the factors that caused prices to rise fast could reverse later, and that could leave some households with less equity in their homes.”
Borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates, Macklem warns. “Counting on ever-higher house prices to build home equity that can be used to refinance mortgages in the future is a bad idea.”