You might have seen the recent Benchmark Rate Decrease announcement in the news. What does this mean for Buyers and Refinancers? Will this revive the slumping Vancouver Housing Market?
Let’s Revisit the Stress Test
In 2018 the Stress Test took affect and change how ALL Canadian Mortgages are now qualified. Before the Stress Test you would be qualifying a conventional 5 year fixed at the contract rate (lower than Benchmark) while All Variable Rates and fixed terms shorter than 5 years would qualify at the Benchmark rate. With the Stress Test all mortgages will now need to qualify at the greater of the Benchmark Rate or the contract rate + 2%.
This change has generally decreased buying power of a given individual by 18%. Also many “Niche” lending programs were eliminated as Lenders examined their overall risk tolerance.
Benchmark will usually follow the general mortgage market in fixed rates, so when rates go up so does the Benchmark. But with the big fixed interest rate drops we have seen to date in 2019 we were met by Benchmark holding firm at 5.34%, until now.
It has now dropped by 15 interest rate basis points to 5.19%.
How Does This Change Mortgage Qualifying?
Well let’s take a look at a fictional buyer earnings $100,000 per year, buying a property with $300 strata fees and $1,200 annual taxes. Let’s assume she has a 20% down payment and we will look at a 25 year amortization mortgage.
I’ll spare you the calculations, but here are the results.
Maximum Mortgage under 5.34% Stress Test = $472,736
Maximum Mortgage under 5.19% Stress Test = $479,632
So there you have it, this decrease in Benchmark has given this buyer a budget increase of less than $7,000, or as a percentage she can now afford a mortgage that is 1.46% larger. So, as you can see it’s an improvement, but no where near recouping the 18% in buying power that she lost when the Stress Test went into affect.
Let’s not look a Gift Horse in the mouth, but the housing market in and around Vancouver is hurting and many First Time and Move Up buyers are not qualifying for mortgage they could have two years ago. Unless the Stress Test formula can be softened I don’t see things quickly turning around.
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