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Why I'm stressed about the new stress test
The Office of the Superintendent of Financial Institutions (OSFI) recently announced it’s revisiting the stress test on conventional mortgage loans (i.e. at least a 20% down payment on a purchase or refinances), slated for June 1 implementation.
Currently, borrowers are stress tested against the current mortgage qualifying rate of 4.79%, or the contract rate plus 200 basis points (2%)—whichever is greater. Most Canadians fall into the former camp of having to qualify at 4.79%.
But, if the bank regulator has its way, this rate will increase to 5.25%, which will, on average, reduce the maximum qualifying amount for a mortgage by approximately 5%.
The problem here is that this policy change is meant to try and cool a red-hot market, but it’s focusing on the wrong variable. There are many mechanisms that have various effects on our housing market, but reducing the affordability of Canadians who are, by all accounts, in the lowest risk category for defaulting is just plain silly. These borrowers are already demonstrating a strong commitment to conservative spending by having the required 20% down payment to avoid the mortgage insurance. So why punish them? And what’s the real issue?
With mortgage interest rates currently below 2% and Canadians having to qualify at over twice this rate, we already have a robust stress test that maintains a healthy margin for Canadians to weather an economic storm. Most of my clients are paying thousands less a year than they were when they were renters, and these changes are only affecting the middle class’s ability to enter the real estate market.
There’s a really not-so complicated economic theory called the law of supply and demand. The more goods or services that are available (supply), the lower the demand (and, by extension, price). We’re facing a housing shortage. It’s one of the reasons we are witnessing record-breaking home prices and bidding wars on properties. With only so many properties available on the market, and COVID-19 sparking an exodus out of major urban centres, it’s sent a demand shock across many markets by outstripping supply by a wide margin.
For now, it looks like the proposed increase to the stress test will be on a federal level, affecting banks and not provincially-regulated credit unions. It’s especially important to monitor these changes if you are considering purchasing pre-construction or are already in a contract, as most require a minimum 20% down payment.
Regardless, if you have been planning to either purchase and will need a conventional mortgage, or are in the process of refinancing with a closing date after June 1, you’ll want to reach out to your mortgage broker to see how these changes will affect your plans.