Rate falls to 4.79% to theoretically allow a borrower to be approved for a larger loan
The bar at which the finances of Canadian mortgage borrowers gets tested has just been lowered, making it easier for would-be home buyers to reach.
Five-year posted mortgage rates at Canada's big banks have inched lower in recent weeks, enough to compel the Bank of Canada to formally lower the average rate they base their calculations on to 4.79 per cent.
That's significant because that's the level the so-called stress test is based on. Announced in 2017, the test was designed to cool the overheated housing market of the time by making sure borrowers would be able to pay back their loans if rates were to suddenly rise.
Even if a borrower could get a mortgage at, for example, three per cent, that person's lender was obligated to crunch the numbers as though the rate was higher — at around five per cent, for example — to make sure the loan wouldn't be too onerous for the borrower to pay back at their income level if rates were to suddenly rise. If the borrower failed the test at the higher rate, the lender wasn't allowed to lend to them, even if they wanted to.
That testing rate has already been lowered twice in this pandemic, first in mid-March when it dropped 15 points from 5.19 per cent to 5.04, and then again in May when it dropped another 10 points to 4.94 per cent.