Ottawa’s mortgage stress test is about to get a little easier.
Mortgage experts expect the Bank of Canada to cut its benchmark five-year mortgage rate to 4.79 per cent from the current 4.94 per cent as soon as this Wednesday, as the majority of the big Canadian banks now have a five-year posted rate of 4.79 per cent. The central bank sets its benchmark according to the rate that appears most frequently among the six biggest banks.
The reduction in the benchmark rate would make it easier for borrowers to get a bigger loan, which would add more fuel to overheated housing markets.
“It will make qualifying easier, or permit some people to borrow fractionally more,” said Paul Taylor, president with mortgage lobby group Mortgage Professionals Canada.
Under the mortgage stress test, borrowers are required to prove they can afford an interest rate that is either two percentage points higher than their actual contract, or at the Bank of Canada’s benchmark five-year mortgage rate – whichever is higher.
The stress test, which first came into effect for insured mortgages in 2016, was designed to ensure that borrowers were not taking on too much debt and to cool the hot housing market. Initially it slowed borrowing and contributed to prices falling in Vancouver.
But now that borrowers have adjusted to the stress test and mortgage rates are at record lows, home prices are climbing in Toronto, Vancouver and most of Southern Ontario. In the Toronto region, the average selling price of a home soared above $900,000 with detached houses in the city hitting $1,541,003 last month, a 26-per-cent increase over July, 2019.
“If you’re on the bubble of qualifying for a mortgage, you may need every last dollar of buying power you can get,” said Rob McLister, mortgage broker and founder of rate comparison website Ratespy.com.
Mr. McLister said the Bank of Canada’s expected change will have an incremental impact. For example, he said a borrower with a $70,000 income with no other debt could afford $4,000 more on a home with a 5-per-cent down payment.
The Bank of Canada said it does not provide the rate in advance of its scheduled publication on Wednesdays.
The big banks advertise their posted rates on their websites, but their actual rates can be at least two percentage points lower than those rates.
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