Bank of Canada reduces mortgage rate for stress tests

The five-year benchmark rate of the central bank is now 5.19 percent, down from 5.34 percent previously.

This is the first decline in the five-year fixed mortgage rate since September 2016, from 4.74 per cent to 4.64 per cent. It has risen steadily since, until this week.

The eligibility rate is used in stress testing of insured and uninsured mortgages, and a lower rate means that it is easier for borrowers to qualify.

These stress tests require potential buyers to demonstrate that they would still be able to make their mortgage payments if they were faced with higher interest rates or lower income.

The Bank of Canada's five-year benchmark is based on posted rates for the country's six largest banks.

Housing sales slowed last year after the federal government introduced new rules on stress testing for uninsured mortgages – those with an initial down payment of more than 20 per cent – and Mortgage rates have risen slightly.

Since January 1, 2018, uninsured mortgage borrowers have had to prove that they could still make payments at the highest rate between their contractual mortgage rate plus two percentage points and the central bank's five-year benchmark rate.

A stress test already ensured that homebuyers with less than 20 percent down payment and looking for an insured mortgage would qualify with the central bank's five-year benchmark mortgage rate. .

The federal financial regulator explained that the new stricter regulations were aimed at tightening mortgage loans and eliminating some of the market risks.

Housing sales up

Meanwhile, home sales have improved in recent months as mortgage rates drop.

On Thursday, the Ontario Real Estate Association (OREA) called for less stringent mortgage rules, saying policy changes were needed to counter the downward trend in homeownership.

OREA CEO Tim Hudak said in a letter to federal decision makers that Ottawa should consider restoring 30-year mortgages, ease the stress test and completely eliminate the simulation for people renewing their loan with another lender.

Borrowers seeking to renew their mortgage are subject to stress testing if they opt for a new lender, but not if they retain their current lender.

In a letter to the Standing Committee on Finance in May, the Chief Executive Officer of Canada Mortgage and Housing Corporation (CMHC) defended stricter lending rules, saying that "stress testing is exactly what what she is supposed to do. "