female homebuyer shakes hand with real estate agent in office

The federal government is changing the stress test rate for insured mortgages starting April 6.

The new minimum qualifying rate will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. (Insured mortgages are those in which the borrower has less than a 20% down payment. They’ve been subject to the stress test since 2016.)

The minimum qualifying rate is currently the greater of the borrower’s contract rate or the Bank of Canada five-year benchmark mortgage rate — which in effect usually means the homebuyer has to qualify at the central bank’s rate.

That’s because the central bank’s rate, which is based on the posted rates at the Big Six banks, has typically been about 2% higher than the average five-year fixed contract rate for insured mortgages.

The rate change follows a recent review by federal financial agencies, and will allow the minimum qualifying rate to be “more representative of the mortgage rates offered by lenders and more responsive to market conditions,” the finance department said in a release.

The Office of the Superintendent of Financial Institutions (OSFI) is considering using the same new stress test rate for uninsured mortgages (those with down payments of 20% or more).

OSFI has been using a minimum qualifying rate of the greater of the lender rate plus 2%, or the five-year benchmark rate published by the Bank of Canada.

OSFI, which is consulting with stakeholders, has proposed that it will also adopt the new benchmark rate on April 6 to coincide with the changes for insured mortgages.