Recently, the most talked about news for Canadian Homebuyers is the proposed mortgage stress test change. For many, It’s not the news we want to hear, especially if you’re looking to buy or refinance a home later this year. The question is, after June 1st, how is this going to impact your purchasing power; and more importantly, your ability to qualify for a mortgage? We’ll be answering these questions, and sharing some reactions.
Victor here, and welcome to a series of videos that goes behind the scenes of mortgage financing, to help Canadians get approved for a mortgage they deserve. If you’re new here, and want to receive easy to understand mortgage news and tips, consider subscribing.
Let’s talk about the upcoming changes to the stress test. If you’re unfamiliar with the stress test, or just want a quick review on why and how it works, I suggest you watch this video.
So, Canada’s banking regulator (known as OSFI, or the Office of the Superintendent of Financial Institutions), is proposing to raise the uninsured mortgage stress test level to 5.25%, or 2% above the market rate, whichever is higher. Currently the benchmark rate is 4.79%, which means a rate increase of 0.46%. You may say, it’s a very small percentage increase.
Average Home Price Over $1M in Toronto
Well, it’s hard enough today to qualify for a mortgage. To make it worse, according to National Bank economists, the maximum amount that can be borrowed under the new rule would decrease by 4.5%. Seeing that the average home price in Toronto is just over $1 million, that would reduce your buying power by about $50,000. View report on CP24.
Many Canadians Giving Up on Home Ownership
Never mind the $50,000 decrease in buying power, I’m still stunned about the average home price being over $1 million in Toronto. And if you’re just as stunned, you’re not alone. RBC released a survey this week, indicating that some Canadians have just given up on their home ownership dreams. According to the survey, “36 per cent of non-homeowners under the age of 40 have given up on ever buying a home.”
But you might be wondering: “is the stress test partly to blame?” or “why hasn’t the stress test cooled down the market? Isn’t that what it was for?”
Mortgage Stress Test Change Affecting Only Uninsured Mortgages
Before we get into that, let me first clarify: the proposed changes affect only uninsured mortgages. An uninsured mortgage is where you have more than 20% for down-payment, and does not require insurance such as CMHC. These are also known as “conventional mortgages”. So if you’re looking to buy a home for $1 million, and you have at least $200,000 for a down-payment, this pertains to you.
So these changes are not necessarily going to stop first time buyers. Rather, it will affect owners that are well capitalized. In other words, they have accumulated a significant net worth.
This week I had the opportunity to tune into a Mortgage Architects zoom interview with Paul Taylor, President & CEO of Mortgage Professionals Canada (MPC). He had some interesting perspective on the issues.
OSFI’s Real Purpose
For one, he noted that OSFI’s job is not concerned about house prices, contrary to what some believe. They have no vested interest in where the market goes. Rather, they are all about the protection of depositor’s funds. In other words, the deposits you and I make into our bank accounts. Part of these funds are used to loan out money as mortgages, and form part of a bank’s mortgage portfolio.
Fun fact: Canada’s Big Six Banks mortgage portfolio is over $1.1 Trillion!
So OSFI wants to make sure that banks are not issuing money to loans that are too risky at the portfolio level. Banks don’t like risk, which is why it’s so hard to get a mortgage with them. So OSFI helps them by changing the rules to help reduce the risk in their mortgage portfolio. That’s it. In fact, that’s exactly what OSFI is saying.
On April 8, 2021, CBC reported:
“The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” OSFI said in a statement Thursday. “OSFI is taking proactive action at this time so that banks will continue to be resilient.“
Paul noted that they can now feel confident that they have done their job. It has nothing to do with being concerned with the market heating up, or the societal impact.
Risk to Bank’s Mortgage Portfolio
Now, there are further technical reasons for the change, but perhaps it’s beyond the scope of this short video. I will, however, point out that Banks can make some exceptions on GDS/TDS on a case by case basis for uninsured or conventional mortgages. Because there’s that wiggle room, OSFI had to tighten the rules. For example, imagine a case where first-time buyers, with over 20% down-payment, push the upper boundaries of the GDS/TDS ratios and still get approved. The bank has made an exception. Over time, this borrower’s family grows. They have kids. Perhaps they buy a bigger car to accommodate the growing family needs. They take on more responsibility and perhaps more debt. Their debt ratios become worse over time, and now pose a risk to the bank.
Industry Experts React to Mortgage Stress Test Change
Do you agree with that rationale? Let’s see what some experts have to say.
Paul Taylor, President and CEO of MPC, stated:
“Increasing the qualifying rate by another almost 50 basis points will only serve to disqualify more aspiring middle-class Canadians and would-be first-time buyers,”
“While 46 basis points isn’t a tremendous difference, philosophically, we’re continuing with a structure that exacerbates the wealth gap and makes it even more difficult for those without a bank of mom and dad to rely upon to own a home.”
Will Dunning, MPC’s Chief Economist, notes:
“I am struggling to see how this can be justified as a prudential regulatory measure. Prior to today, the hurdle rate used in the stress test was already far in excess of any credible scenarios for future market interest rates,”
“As I commented recently, official data from the Bank of Canada shows that the highest actual average lending rate seen since the start of 2013 is 3.76%. This seems to me to be a reasonable interest rate to use in pursuit of prudent regulation.”
Voice Your Opinion!
What are your thoughts? Do you want your voice to be heard? As a matter of fact, OSFI invites the public to provide feedback, which will be accepted up to May 7, 2021. Here’s the email! B.firstname.lastname@example.org
What do you think about the proposed changes to the stress test? Please share your thoughts in the comments section below.
Navigating all these mortgage rules can be complicated, but I can help! Book your free discovery call and we’ll figure it out together.