The Canadian residential construction industry has voiced its support for the federal government’s recent changes to the way mortgage stress tests are performed, but hopes more can be done to improve affordability for homebuyers.
Finance Canada had announced that the minimum qualifying rate for insured mortgages will be changed by April 06, 2020, to be based on the weekly median five-year fixed insured mortgage rate from mortgage insurance applications (or, alternatively, on the borrower’s contract rate) plus 2%. This new rate is currently over half a percentage lower than the rate of banks.
Canadian Home Builders’ Association CEO Kevin Lee commented that while the reforms were a “step in the right direction,” the government could still do more to help, such as by reducing the interest rate increase for longer-term mortgages, and excluding seven- and 10-year mortgages.
Although he had a lot to say about how much more the government could have helped buyers, Lee admitted to iPolitics in a phone interview that the planned changes will “bring some of the locked out buyers out of the market while still doing it in a responsible way.”
Lee also cautioned that while making changes to the stress test helps, legislators also have to do something about the limited supply of housing, which is driving prices up.
At present, the minimum qualifying rate is based on whichever of the two is greater: the borrower’s contract rate or the Bank of Canada’s five-year benchmark posted mortgage rate, currently at 5.19%. Once the revised stress test formula is implemented, the minimum qualifying rate would roughly be around 4.89%.
Also under current rules, lenders must obtain government-backed insurance on mortgages from borrowers, by placing a down payment less than 20% of the purchase price. No insurance is required for mortgages when the borrower has an equity greater than 20% of the purchase price; in those cases, the Office of the Superintendent of Financial Institutions sets the minimum qualifying rate for uninsured mortgages.
