Changes were announced to the mortgage stress test on Tuesday; hopeful homebuyers will be pleased to learn that the lending restrictions have loosened slightly.

Intended to reduce overall debt vulnerability and create a cushion that would allow highly leveraged buyers the ability to manage their mortgage debt should rates increase, the current mortgage stress test actually presented another set of obstacles for. The current benchmark rate isn’t accurate measure, and doesn’t react swiftly to changes in the market. It is also currently tied to the rates set by the big banks, which was another point of criticism.

The mortgage stress test, introduced in January 2018, did have a short-term impact of cooling the heated real estate market, because the buyer pool effectively shrank; however the longer-term impact have greater implications. At Justin Trudeau’s behest, and after consultation with OFSI and the Bank of Canada, Finance Minister Bill Morneau modified the stress test with changes that are more market-appropriate, centering on the benchmark rate.

For borrowers putting down less than 20% the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. The idea is that this new benchmark rate will be more dynamic and in line with actual market conditions and that including the extra 2% will strike a reasonable balance between qualifying for a mortgage loan and mitigating debt vulnerability. These changes will take effect on April 6.

For uninsured mortgages (i.e. those with 20% or more down) will be subject to the same benchmark rate as well.

In this release, Morneau says, “For many middle class Canadians, their home is the most important investment they will make in their lifetime. Our government has a responsibility to ensure that investment is protected and to support a stable housing market. The government will continue to monitor the housing market and make changes as appropriate. Reviewing the stress test ensures it is responsive to market conditions.”

There may be more to come in terms of policy to help with housing affordability.  These changes are a step in the right direction to ease the constraints of affordability against the reality of a hot housing market. 

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