Canada eases stress test rate for insured mortgages

Friday, March 13, 2020

Canada eased financing requirements for mortgages to boost the housing market and keep prices at bay. The mortgage stress test, a minimum interest rate used as a benchmark to determine if buyers can afford home payments, will be lowered by more than half a percentage point for insured mortgages beginning April 6.

The new rate will use the average bank rate instead of the current stress test rate, which is two per cent above the Bank of Canada’s five-year average.

“The stress test rates were just too high in light of the actual rates being charged by banks,” says Stephen Kerr, a Toronto-based corporate/M&A partner at the law firm Fasken. “The rates were artificially high.”

He points out that when the stress test rates were imposed two years ago, they were meant to protect home buyers from excessive debt, insulate smaller banks from exposure to bad loans, and prevent the housing market from overheating.

But the rates became an election issue after it was argued that the high rates were cooling the housing market too much while also shifting buyers’ debts to non-bank lenders.

“The stress test rate was pushing people who didn’t qualify for bank mortgage financing to less regulated lending markets, and they often ended up actually paying higher interest rates,” Kerr says. “As a result, the stress test had the desired effect for banks, particularly small banks, but as one unintended consequence, the stress test didn’t always help or protect home buyers.”

He also notes that although stress test rates are being lowered, a U.S.-style bubble is unlikely because of the rigorous standards governing the Canadian housing market.

“Canada has historically had more conservative standards for its housing market than the U.S. has for its market,” he explains. “Canadians, for example, can’t make a tax deduction for interest on a home mortgage or walk away from a default on a mortgage.”

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