Bank of Canada’s mortgage ‘stress test’ rate climbs higher
Central bank’s rate for deciding if you can afford a mortgage is raised 20 points to 5.34%
As mortgages get more expensive with interest rates rising in Canada, the hurdle that some borrowers must pass is also getting higher.
The interest rate used by the Bank of Canada for mortgage stress-testing went up by 20 basis points Wednesday to 5.34 percent from 5.14 percent, where it had been since mid-January of this year.
The rate used has now gone up five times since last May when it stood at 4.64 percent.
The central bank’s rate is based on a survey of conventional five-year rates available at the big banks.
“The change in the Bank of Canada five-year benchmark rate not only means Canadians will pay more per month for their mortgage, it also means the amount Canadians can qualify for has diminished,” James Laird, co-founder of Ratehub Inc. and president of CanWise Financial, said in a release.
“This increase will put pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market,” he said.
Under new rules that came in force on Jan. 1, all home buyers with high-ratio mortgages — those with a down payment of less than 20 percent of the price of the home — or an uninsured mortgage have to go through the mortgage stress test.
The test is based on qualifying for the greater of either the Bank of Canada qualifying rate or the buyer’s contracted interest rate plus two percentage points.
“The idea behind [the test] is to make sure you can afford your mortgage at a time when interest rates are going up,” Cynthia Holmes, an associate professor and chair of the real estate management department at the Ted Rogers School of Management at Ryerson University, told CBC News in an interview.
“They want to make sure you can afford your mortgage with a good solid rate in place, not that you can only afford it if rates are really really low,” Holmes said.