Canada’s stress test for uninsured mortgages has been under fire from the real estate industry, but it appears policymakers are unlikely to budge and scrap the year-old measure.
There may, however, be ways to change the mortgage stress test to help homebuyers without getting rid of it altogether, experts suggest. In fact, a recent report suggests regulators are considering adjusting the rules, which currently require mortgage applicants to qualify at higher rates than they are actually signing on for, sending shockwaves through the housing market.
The impact on market activity has been palpable, with Canadian home sales down 4 percent on a year-over-year basis as of January. So what exactly should policymakers do as they weigh debt-related risks to the economy and the health of the housing market? Here’s what experts are saying the changes should look like.
Lower the stress test
The stress test introduced last January in an effort to cool the housing market requires uninsured mortgage borrowers to qualify at either 200 basis points over their contract rate or match the Bank of Canada’s five-year benchmark rate, whichever is higher. Previously, stress testing only applied to insured mortgages, so if a borrower could muster a 20 percent downpayment to avoid mandatory mortgage insurance, they could sidestep the stress test, too.
While industry group Mortgage Professionals Canada supports a stress test, its CEO Paul Taylor says the threshold should be lowered. “We’ve always been advocating for a bit of a reduction, we’ve never advocated for an elimination of it,” he says. Taylor says the test should be loosened to 75 basis points above the contract rate. Given the most common mortgage type is a five-year fixed-rate, borrowers have years to build equity before they need to renew at a new rate. Household incomes also generally increase over time. That gives a homeowner some flexibility in the face of potentially higher rates in the future.
Waive the test for mortgage renewals
If a borrower’s mortgage comes up for renewal today, they’ll need to pass the stress test again if they want to shop around for a better rate from another lender. “They’re held hostage by the first bank,” says Phil Moore, president of the Real Estate Board of Greater Vancouver. “Now, that’s not fair to Canadians,” he adds. He recommends waiving the stress test to improve fairness. “Banks are cashing in on all those renewals.”
Mortgage Professionals Canada’s Taylor agrees. “If you’ve shown that you can pay your mortgage as agreed, and you’ve got a payment history of that, then requiring you to qualify at the next lender only makes it more difficult for you to shop the market and get a competitive rate,” he says. “So there’s a lot of consumers across the country that are probably paying more interest than they otherwise would be.”
Reward bigger downpayments
The stress test is a broad measure. No matter where you are in Canada, if you want to take out a mortgage from a federally regulated financial institution, you’re going to be tested. But it’s also a one-size-fits all approach regardless of how much you put down. REBGV’s Moore suggests that should change.
He floats the idea of a scaled approach, where borrowers who put forward bigger downpayments face a lighter barrier.”Maybe if there’s a 30 percent downpayment, maybe it’s (the stress test) 1.75 percent” above the contract rate, he says by way of example.