It just got a little tougher to qualify for a mortgage in Canada.
A rate used in mortgage stress tests – more formally known as the Bank of Canada’s conventional five-year mortgage rate – is now 5.34 per cent, up from 5.14 per cent. This is the fifth time since last summer the rate has climbed higher.
Canada’s big banks have raised mortgage rates in response to higher bond yields and a generally stronger inflationary climate. (The five-year bond yield broke through 2.2 per cent on Wednesday for the first time since mid-2011.) In turn, the BoC’s rate – which is the most frequently occurring five-year, fixed posted rate at the Big Six banks – has risen.
That means Canadians face increasingly stringent stress tests, potentially lowering the amount they can actually spend.
Uninsured home buyers are tested at the greater of the BoC’s rate or their negotiated contract rate plus two percentage points – a policy that went into effect this year. It’s similar to a test on insured home buyers, which tests them at the greater of their negotiated rate or the BoC’s rate, and was implemented in the fall of 2016.
Uninsured buyers are typically those who make a down payment of at least 20 per cent, while those who fall under the threshold require default insurance.
Essentially, buyers are tested on their ability to afford mortgage payments at higher interest rates. Stress-test policies arrived during a period of meteoric price growth in various Canadian housing markets, notably those of the Toronto and Vancouver areas.