January 30, 2020
How Changes to the Mortgage Stress Might Affect You
Written by Steven Tulman
The federal finance minister, under a directive from Prime Minister Trudeau, will be evaluating suggestions from financial agencies on how to improve the mortgage stress test. Currently, to qualify for an insured mortgage, buyers must prove they can purchase at a mortgage rate that is 200 bps (2%) higher than the rate that they qualify for, in order to assure lenders that borrowers will be able to continue making their mortgage payments if there are changes in income or market conditions. Until recently, the Liberal government objected to making changes to the test. However, Canadians elected the Liberals as a minority government, which may encourage Trudeau’s cabinet to make concessions with the Conservatives concerning the future of the mortgage stress test.
Our expert mortgage brokers at Clover Mortgage have welcomed the review process, in hopes of easing financial strains on mortgage buyers who cannot pass the stringent requirements of the test. Professional brokers at Clover Mortgage have also argued that stress tests applied to borrowers who intend to switch mortgage lenders, get a mortgage refinance, or renew their mortgage are anti-competitive and anti-consumer, given that the flexibility for borrowers to find the lowest mortgage rates becomes limited. Our brokers recognize that stress tests are valuable in assessing and protecting the financial stability of borrowers, but we also support the government’s efforts in encouraging new buyers to participate in the mortgage market.
Our mortgage analysts predict two major changes to the stress test. First, the way the minimum qualifying rate is determined may be re-evaluated. Currently, the stress test rate is based on the benchmark 5-year posted rate, which is influenced by the 5-year fixed rates created by the Big Six banks. This leaves room for various bureaucrats to sway banks to maintain higher rates. A more favourable option would be to base the stress test based off of a rate that is determined by market conditions. The government could implement such a rate by basing the mortgage qualifying on an objective number, such as 300 bps in addition to the yield from a 5-year bond. Had that been the case, the qualifying rate would have been 4.30%, rather than stagnating above 5% as it has been for the past few years.
Second, restrictions imposed on borrowers attempting to switch lenders may be eased. Borrowers interested in switching lenders for a more competitive mortgage rate at the time of renewal must face the stress test for a second time, while those who choose to renew with their current lenders can forego the test. As a result, more borrowers find themselves locked into mortgages with the same lenders rather than switching to more affordable rates. Given the adamant criticism the government has received from experts in the mortgage industry for such a regressive policy, the Liberals are likely to be inclined to improve the flexibility for borrowers to switch lenders.
To maintain the current trend of blooming home prices, the government is likely to take a thoughtful, measured approach in determining which changes to make to the stress test. In addition, for such changes to effectively assist borrowers over the long term, governments should also seek to improve housing affordability by supporting efforts to increase the housing supply. While loosening the stress test restrictions and nurturing its flexibility will provide momentous relief for borrowers, housing affordability will continue to be an issue for borrowers that are unable to secure the lowest mortgage rate for the limited housing supply available.
To better navigate the mortgage market and the implications of the forthcoming stress test changes, secure the services of an expert mortgage broker at Clover Mortgage by calling us at 416-674-6222 or email us at firstname.lastname@example.org . Enlist the extensive expertise of our expert mortgage broker team to find the ideal mortgage rate for your dream home