Looking to purchase a home in 2020? If so, you picked a great year to make your move. Finance Minister Bill Morneau recently announced that the Bank of Canada will set a new key benchmark interest rate for the mortgage stress test, making it easier for borrowers to qualify for loans.
Here’s what you need to know:
What Are The Current Mortgage Rules?
Currently, homebuyers who apply for a default-insured mortgage must pass a stress test.
This is designed to prove they can pay their mortgage at interest rates that are either 2% more than their actual contract, or at the Bank of Canada’s benchmark rate – whichever is higher.
The rule applies to anyone applying for an insured mortgage (which is mandatory for those putting down less than 20% of their purchase price).
What’s Changing?
The Bank of Canada’s current benchmark interest rate is based on the five-year posted rates at Canada’s largest banks, which are typically much higher than the rates that borrowers end up paying.
The new benchmark rate will be based on Canada’s median five-year fixed insured-mortgage rate plus two percentage points, which is more in line with the average contract rate.
With a rate cut predicted for the coming spring or summer, the stress test rate could fall even lower. The government will also make the stress test more flexible, so the rate could change weekly.
How Will It Impact Buyers?
These new qualifications lower the bar for buyers to pass the stress test, making it easier for them to get approved for more substantial loans.
It could boost buying power by 3%, depending on the borrower. For example: A buyer with an annual income of $100,000 could now borrow up to approximately $13,000 more. (source)
All in all, this is fantastic news for those who are planning to purchase a home this year, as these rules will open more doors for buyers who may not have been able to pass the stress test previously.
What Happens Next?
The Office of the Superintendent of Financial Institutions is seeking feedback on these proposed changes until March 17th. They will finalize the new mortgage rules by April 1st and the changes will come into effect April 6th.
Are you a buyer trying to navigate the real estate market on your own? See how much easier it can be when you work with an expert. Contact St. Jean Realty today by calling 1-844-484-SOLD or emailing us here.
