Bank of Canada lowers mortgage stress test rate for the first time in three years

By: Lisa Coxon on July 22, 2019

The Bank of Canada (BoC) dropped the qualifying interest rate for the mortgage stress test on Friday, making it easier to qualify for a mortgage.

The rate at which would-be homeowners need to qualify for a mortgage is now 5.19%, down from 5.34%. This is the first time in three years that the BoC has lowered the mortgage qualifying rate.

The decrease will have a direct impact on those being “stress-tested” against either a higher interest rate from their bank or the five-year benchmark rate published by the BoC (whichever is higher) when applying for a mortgage — a rule that came into effect in January of 2018.

While it’s not an overly meaningful move, this new change in the BoC’s benchmark rate means it’s slightly easier for homeowners with uninsured mortgages (meaning their down payment was less than 20%) to pass the stress test. This means they could buy a more expensive home than they might have been able to previously.

Samantha Brookes, CEO of Mortgages of Canada, told CBC News that this move by the BoC won’t have much of an impact on the housing market.

“It allows someone purchasing to buy a little bit more but it's not that significant,” she said. “Consumers are in this wait-and-see pattern — it's still difficult to get into the market because that stress test is there.”

Even though the stress test caused a $15-billion drop in new mortgages last year — proving that it has achieved what it was put in place to do —  it’s still something that nearly 20% of Canadians were failing last summer, nearly half of Canadians still don’t really understand, and something that’s pushing Canadians to take mortgages from private lenders, which can oftentimes be less stable than banks.

It’s also something that’s sparked much debate among groups like the Ontario Real Estate Association, the Toronto Real Estate Board (TREB), the International Monetary Fund, Canada Mortgage and Housing Corporation (CMHC), and even some economists.

On one side of the aisle are those like TREB who say that the rules need to be relaxed because so many are still locked out of the housing market as a result of the test’s strict qualification metrics. And on the other are those like the CMHC who say that doing so would be a “reckless myopia.”

Nick Kyprianou, president of RiverRock Mortgage Investment Corporation, a Toronto-based alternative mortgage lender, told CBC News that while Friday’s rate drop is negligible, it has the potential to give homebuyers a newfound confidence.

“This is a psychological game,” he said. “If people feel confident they'll get back in the market.”