We have a little over a month before Canada’s Banking Regulator launches the new controversial mortgage stress test. It’s aimed squarely at those who carry a heavier debt-load and more than 20% equity. Looking at where Canada’s home prices and debt levels are, this is quite clearly the most significant mortgage rule change to date.
Uninsured borrowers can qualify today for a five-year fixed rate as low as 2.97%. In a little over 30 days that will jump to nearly 5%. If the changes affect you, you could need upward of 20% more income to qualify for the same mortgage that you could get today. Approximately one in six uninsured borrowers could feel the effects of these new rules based on the Bank of Canada estimates of “riskier borrowers” and predictions from industry economists. Those affected could be forced to defer buying, pay higher rates, find a co-borrower and/or put more money down to qualify.
Why are the rules changing you ask? Well, forcing people to prove they can afford much higher rates will substantially increase the quality of borrowers in Canada’s banks. The Office of the Superintendent of Financial Institutions (OSFI) argues that this will insulate our banking system from economic shifts, which, if they’re correct, is a good thing.
Many buyers with higher debt, relative to income, will resort to higher-cost lenders who allow more flexible debt ratio limits. At the very least, more borrowers will choose longer amortization periods and take longer to pay down their mortgage. Non-prime lenders will become pickier because they’ll see an influx of formerly “bankable” borrowers who are now being declined by “The Big Six”. This will force hundreds of thousands of borrowers into the arms of lenders with the highest rates.
In terms of provincially regulated lenders, unless they follow the OSFI’s lead (if history is a guide, they won’t), it’ll be a bonanza for some credit unions. Many will still let you get a mortgage based on your actual contract rate, instead of the much higher stress-test rate. Which means you’ll qualify for a larger loan if you want one. We may also see a few non-prime lenders charge lower rates to help people qualify for larger mortgages, while tacking on a fee for the privilege of course.
Lenders are thrilled about one thing: customer retention. As many as one in six people renewing their mortgage could be trapped at their existing bank because they can’t pass the stress test at another lender. And if a bank knows you can’t leave, you can bet your boots they’ll leverage that to serve you a subpar renewal rate.
While few credible sources expect OSFI’s announcement to trigger a housing crash, the higher rates go, the more this will slow housing. Financial markets expect another rate hike by January, with potentially two to four, or more, to come. The OSFI may revisit the restrictiveness of the stress test if rates surge, but will the regulator act in time to prevent diving home values? That’s the trillion-dollar question. The good news is that rates generally rise with a strengthening economy, which is bullish for housing – for at least a little while.
Source Credit: The Globe and Mail