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February 2020 – THE MORTGAGE STRESS TEST

Buying a new home is already challenging enough as is. There are crucial considerations to be made, such as the future development of the neighborhood where the listed property is located, how to effectively negotiate for the purchase of the new property and how to handle the sale of any existing property.

However, back in late 2016, it became just that much harder to purchase a property, as the rules around fulfillment of financial conditions dramatically shifted. The Federal Government introduced new rules with respect to obtaining mortgages, particularly high ratio mortgages. The changes stemmed from the need to cool off some of the rapidly escalating real estate markets such as Vancouver and Toronto, which coupled with foreign money investment, made a vast majority of standard housing in the cities unaffordable.

The basic premise of the stress test is to ensure that high-ratio mortgage buyers (the ones putting less than 20% down payment and thus covered by insurance companies such as CMHC) are still able to afford the mortgage they are attempting to qualify for, if interest rates were marginally or substantially higher. In most cases, this involved buyers qualifying for the negotiated rate with their bank lenders, as well as the standard posted 5 year closed fixed mortgage rate. Buyers seeking conventional mortgages were exposed to the stress test as well, but at a more favourable rate comparison.

The test has succeeded in cooling off the market, and limiting potential buyers, the objective for which it was implemented for in the first place. First time home buyer purchase potential has been slashed by as much as 20%. The test had also made it harder for existing homeowners to renew or refinance their mortgages upon the expiry of their term. In theory, the stress test could be avoided by going outside of the federally regulated lenders such as credit unions or private lenders, most of the time at a premium. In reality, this shift was quantifiable for most of 2019. During the first half of the year, housing sales financed through Canadian banks dropped to $60.3 million, in comparison to $64.9 million during the same time period last year. In turn, mortgage refinancing fell to $30.1 million, compared to $35.3 million during the same time period last year.

In this economy, hardworking Albertans deserve a break.

With the mortgage stress test, it seems that break has finally arrived for new homebuyers.
On February 18, 2020, the Finance Minister Bill Morneau and the Office of the Superintendent of Financial Institutions announced that they aim to replace the current benchmark interest rate that is used in stress tests for both insured and uninsured mortgages. As a result of the current benchmark not reflecting the current housing conditions in the country, a new rate will be implemented on April 6, 2020. The government will continue to assess the housing market and make additional changes to the stress test if necessary. It was stated that the new benchmark for the tests will be a weekly, five-year interest rate calculated by the Bank of Canada and based on mortgage insurance applications, plus a “buffer” of two percentage points.

Springtime is when it’s truly “busy season” for first time buyers or those that are looking to upgrade. With relaxation in the mortgage stress test, it is likely that things will get even busier. So, take a step back, light up that BBQ, look to your left and look to your right. Do that again in a couple of weeks and chances are, you might be looking at something or someone completely different.

Steve Dimic

If you have any additional inquiries regarding any of the topics or if you have ideas for future topics, please feel free to email me at stevedimik@hotmail.com

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