More Rigorous Mortgage Stress Tests Won’t Chill Home Prices, Real Estate Experts Say

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More Rigorous Mortgage Stress Tests Won’t Chill Home Prices, Real Estate Experts Say



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Canada’s new mortgage stress test will require borrowers to prove they can make their mortgage payments at an interest rate of 5.25%, down from 4.79%.

Graeme Roy / The Canadian Press

Homebuyers will see their purchasing power drop slightly under the new mortgage stress test in Canada, but experts warn the tighter rule will have little effect on the prices of leaking homes.

The Office of the Superintendent of Financial Institutions (OSFI) plan for uninsured mortgages, announced Thursday, would in fact require borrowers to prove they can make their mortgage payments at an interest rate of 5.25%, against 4.79%.

Banking regulator relaunches consultations on overhaul of mortgage stress test after pandemic disruption

The banking regulator estimates that the proposed change would reduce the maximum mortgage a borrower could take out from 2% to 4% if the loan amortization period remains the same. The change applies to borrowers who are not required to purchase mortgage insurance because they have a down payment of 20% or more of the purchase price.

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For example, a Bank of Montreal calculation estimates that the new stress test would reduce a mortgage approval from $ 1 million to $ 955,000.

“The immediate effect is that you qualify for less,” said James Laird, president of CanWise Financial mortgage brokerage. Like other real estate experts, he predicts an increase in borrowing and buying before the plan takes effect on June 1.

Share of new mortgages with a loan

income ratio greater than 450%

Mortgage insurance rules are tightened

THE WORLD AND THE COURIER, SOURCE: BANK OF CANADA

Share of new mortgages with a loan

income ratio greater than 450%

Mortgage insurance rules are tightened

THE WORLD AND THE COURIER, SOURCE: BANK OF CANADA

Share of new mortgages with loan-to-income ratio

more than 450 percent

Mortgage insurance rules are tightened

THE WORLD AND THE COURIER, SOURCE: BANK OF CANADA

The reduction in loan amounts would primarily affect first-time home buyers who are already struggling to buy in expensive areas like Toronto and Vancouver. Even so, some real estate experts say the rule change is unlikely to have a huge impact.

“The effects on borrowers will be negligible,” said Laura Martin, chief operating officer of mortgage brokerage firm Matrix Mortgage Global. “Buyers will still be able to qualify for mortgages in the same amounts as before by adding a co-signer or pursuing alternative lender options,” she said.

Since the start of the COVID-19 pandemic, home sales and prices have set records across the country. Now, with a severe shortage of properties for sale and strong demand for bigger homes, economists don’t expect OSFI’s proposal to slow the market down.

“Any easing is expected to be temporary, and this policy is unlikely to significantly alter market psychology or result in a large or prolonged decline in activity,” said Rishi Sondhi, economist at the Toronto Dominion Bank.

Even though borrowers will need to qualify for a bank mortgage at a slightly higher interest rate, the actual interest rates they pay on loans remain low. Five-year fixed mortgages are less than 2%, making it easier for borrowers to service debt.

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“The real borrowing rates that consumers see are not moving. Therefore, the tone and psychology of the market may not change much, ”said Douglas Porter, chief economist at BMO.

What the stress test change actually means to you as a mortgage buyer

Ms. Martin of Matrix Mortgage agreed and said the impact on the market “will be a drop in the bucket compared to the overwhelming demand from impatient new buyers” and those moving to larger properties.

The last time policymakers acted to cool the housing market was during the boom years of 2016 and 2017. the changes also contributed to the real estate downturn that followed. They included new taxes on foreign buyers in British Columbia and Ontario and rising interest rates. Ottawa also introduced the mortgage stress test, which increased the rate that eligible borrowers were required to meet by at least 200 basis points. OSFI’s current proposal only increases this threshold by an additional 46 basis points.

Either way, the banking regulator is the first decision maker to take concrete action to slow the housing market. OSFI said the stricter rule was a proactive step to ensure banks continue to remain resilient in an overheated real estate market.

Bank of Canada staff released a special report on Friday indicating that housing market vulnerabilities have increased in recent months. The rating report, which is independent of the central bank’s board of governors, found that the share of heavily indebted households taking out mortgages has increased significantly.

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