Bank of Canada Lowers Rate Used in Mortgage Stress Tests
Bank of Canada Lowers Rate Used in Mortgage Stress Tests | A key Canadian interest rate used by lenders to determine who can qualify for a mortgage has dropped for the first time in almost three years, potentially giving the country’s housing market a near-term boost. The Bank of Canada lowered its 5-year conventional mortgage rate on Wednesday to 5.19%, from 5.34%, where it had been since May 2018. It’s the first decrease since August 2016. The rate is an indicative measure based on average price quotes from financial institutions.
Bank of Canada Lowers Rate Used in Mortgage Stress Tests
A key Canadian interest rate used by lenders to determine who can qualify for a mortgage has dropped for the first time in almost three years, potentially giving the country’s housing market a near-term boost.
The Bank of Canada lowered its 5-year conventional mortgage rate on Wednesday to 5.19%, from 5.34%, where it had been since May 2018. It’s the first decrease since August 2016. The rate is an indicative measure based on average price quotes from financial institutions.
Lenders must use the benchmark, which is usually higher than the contract mortgage rate, to determine who can qualify for a mortgage. Borrowers are required to prove they can afford monthly payments at the benchmark rate or higher.
The so-called stress tests are part of tougher guidelines imposed by Canada’s banking regulator to ensure the quality of new loans after sharp price increases in some cities such as Toronto and Vancouver. The guidelines have come under fire for causing an outsized slowdown in the housing market.
The lower rate means someone who earns C$50,000 ($44,400) a year can afford to pay C$2,800 more for a home, assuming a 5% downpayment, according to Rob McLister, founder of RateSpy.com, a mortgage comparison website which first flagged the drop in the rate. With a 20% downpayment, someone earning C$100,000 a year can afford to pay C$8,300 more, he said.
“Will this buying power stimulus turn the housing market around?” McLister wrote on his blog. “Hardly. But it’s an incremental psychological boost for buyers that adds a modicum more support for home prices.”
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