New home mortgage stress test
February 1, 2018
Qualifying for a home mortgage became more difficult at the beginning of this year, and will add downward pressure on house values.
This is not a prediction that the value of homes will decrease. Downward pressure could result in smaller increases in the value of houses or, in fact, a decline in prices.
The government has put the brakes on real estate spending. This is the seventh time they have tried to cool the red-hot housing market.
As of January 1, a new mortgage qualification stress test came into effect for new Canadian homebuyers and those refinancing an existing mortgage with a new lender. This does not include anyone renewing their mortgage with their current lender.
Under the previous rules you qualified for a mortgage based on the mortgage interest rate. The key question: could the borrower afford the cash flow requirements necessary to make the payments?
Now the qualification is based on the greater of the mortgage interest rate plus two per cent, or the Bank of Canada’s five-year benchmark rate, which is currently 4.99 per cent.
Assume you could find a mortgage with an interest rate of three per cent. You would have to afford mortgage payments based on 3 per cent plus an additional two per cent.
With a stress test of five per cent, fewer people will qualify for mortgage financing.
Those would-be homebuyers will have to find a cheaper house.
Analysis by the Bank of Canada found that about 10 per cent of Canadians who were previously approved for a home mortgage would not be approved under the new, more restrictive, rules.
There is a problem with these changes to the mortgage qualification process.
Existing mortgage holders will only be subject to the more restrictive qualification standard if they change lenders when their mortgage expires.
That could be unfair to the borrower.
Their current lender will know if they will pass or fail the new mortgage stress test.
Failing will curtail the borrower’s ability to look for a better interest rate. In some cases, they may have to accept an uncompetitive interest rate.