Mortgage Stress Test Overreaction

I mentioned in a recent blog post of mine how rising interest rates are scaring prospective buyers and reducing affordability. However, interest rates have only gone up a tiny bit, and we recently saw a big stock market correction – and now economists are forecasting a recession at the end of 2019 or in 2020. Now that it’s clear that we are not facing inflationary pressures which necessitate rate increases to moderate, the federal government should reevaluate its mortgage stress test parameters.

I’m a big advocate of less government intervention. With the new mortgage rules, the government got involved in Canadians’ finances and made a mess. The mortgage stress test was initially introduced by the federal government in October 2016 and was revised in October 2017, requiring potential homebuyers to qualify for a mortgage using the higher of their contracted mortgage rate plus 2% or the 5-year benchmark fixed rate published by the Bank of Canada. Last year, in January 2018, the rules were changed again and got even tougher – the stress test began applying even to uninsured mortgages, i.e. to people paying 20%+ of their home’s price in their down payment. The banks were in favour of the stress test as they wanted to protect themselves, and the rules were introduced with the expectation that interest rates would rise and with an aim of limiting the amount of debt that Canadians and financial institutions would take on.

But we’ve now seeing that the interest rates aren’t going up that much, certainly not by a considerable 2%. The Bank of Canada announced last week that it was maintaining its rate at 1.75%.

If the rates aren’t increasing as high as expected, why do people need to continue qualifying at 2% higher? We don’t need this 2% buffer. Although the rules are supposed to be protecting the Canadian housing industry and buyers (ensuring that they’re spending within their means), the rules are in fact hurting potential buyers. They effectively lower the amount that banks can lend potential home buyers, and many people are qualifying for 15-20% less than before – forcing many completely out of the market. These rules are disproportionately hurting first-time buyers, making it harder for young people and new immigrants to buy homes. Why is the government punishing millennials and newcomers who are trying to get into the market, and putting the Canadian dream farther out of reach? I’m calling for the government to roll back the mortgage stress test. A 2% rate increase for qualification purposes is completely unnecessary given today’s market. I suggest lowering it to 1% (or 0.75%, as Mortgage Professionals Canada is calling for) or eliminating it completely.

The stress test is hampering affordability, which is the main barrier to home ownership. It is greatly contributing to the real estate decline we’re having now, and it is artificially suppressing the demand for housing and preventing first-time homebuyers from getting into the market. This is only going to hurt our market and economy in the long run.

This is a federal election year. Perhaps a change to the rules could help the Liberals?

What are your thoughts? Comment below or find me on Facebook or LinkedIn to join the conversation!

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