A New Stress Test Announced for Insured Mortgages

Market stability concerns prompted the Department of Finance (DoF) to announce today that default-insured mortgages will have the same stress test as uninsured mortgages, effective June 1.

In a statement, the DoF said:

“With today’s official confirmation from OSFI of the new minimum qualifying rate for uninsured mortgages, the federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages, subject to review and periodic adjustment, which will be the greater of the borrower’s mortgage contract rate plus 2 per cent, or 5.25 per cent.”

The insured mortgage rule change will impact the roughly 1 in 5 homeowners who get a new insured mortgage. It will cut their maximum theoretical buying power by over 4%, compared to the current 4.79% stress test rate.

The government will adjust the minimum qualifying rate at least every December, it said. Most likely, the next adjustment will be up if inflation takes rates higher, as expected. That would further restrict credit in 2022.

Many Saw it Coming

The DoF following in OSFI’s footsteps isn’t a total surprise — for multiple reasons:
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1. Borrowers are taking on “significantly more mortgage debt” thanks to mushrooming home prices, the Bank of Canada said today.
2. The Bank’s Financial System Review went on to note: “…borrowers with both a high loan-to-income ratio and a high loan-to-value ratio are associated with a greater risk of falling behind on debt payments.”
3. Soaring home values could result in more people getting insured mortgages because they can’t come up with a 20% down payment.
4. Banks prefer one set of qualifying rules versus two.

Source: Bank of Canada

The alignment of the insured and uninsured stress test rules was, therefore, an inescapable choice, officials likely thought.

Effect on First Timers

A big chunk of insured borrowers are first-time buyers. Today’s news is both bad news and good news for them. Obviously, it cuts buying power, but that also means fewer people will be able to bid as much for homes, reducing some price pressure.

The move also removes most of the buying power advantage afforded by the Liberal government’s new First-Time Home Buyer Incentive. A neutered FTHBI might be just what they had planned all along, however, given housing stability concerns.

The FTHBI’s main utility now will be in reducing interest and default insurance costs. (See: First-Time Home Buyer Incentive an Enigma.) It continues to be a taxpayer-funded subsidy that will appeal only to the few borrowers who: (A) remotely understand it, and (B) want the government to shoulder some of their price risk if home values correct.