We’ve had a little time to settle in to 2020 and reflect on how much things have changed, in Real Estate, over the past ten years (Think Prices $$$). Likewise, the Mortgage Industry has endured many changes too:
- Real Estate prices have increased steadily, affecting affordability
- Canadians are carrying more personal debt than ever before
- The “Stress Test”, introduced in 2018, made it harder for borrowers to qualify for a mortgage
- Mortgage Fraud is on the rise
- Lenders have tightened up their requirements, becoming more diligent about down payment, income and employment verification
- Single income households are now the most common arrangement and women are purchasing more homes independently
- The government introduced the First Time Home Buyers Initiative
- Interest Rates continue to fall in 2020
How Does the Stress Test Affect You?
The mortgage “Stress Test” was one of the most newsworthy changes over the last several years. It was introduced to provide a buffer to protect borrowers and lenders in case of financial difficulty such as job loss that would affect the ability to make mortgage payments.
Originally, it only applied to certain borrowers, such as those applying for a mortgage with less than 20% down payment, whose property needed to be insured against default by CMHC, Genworth or Canada Guaranty.
As of January 2018, in an effort to combat the high rate of personal debt in Canada, the Stress Test was modified to include almost everyone. Exceptions include those borrowing through credit unions or private lenders.
Typically now, when you apply for a mortgage or a refinance, you need to qualify at an interest rate that is higher than you will actually pay (your contract rate + 2%, or the Bank of Canada Current 5-yr Benchmark, whichever is higher).
For example: You may be able to get a rate of 2.75% with your lender, while the BOC Benchmark sits at 5.19%.
Even though 2.75% + 2.0% is only 4.75%, since the Benchmark is higher, you need to qualify at 5.19%.
The stress test is meant to provide a buffer, for borrowers and lenders, to ensure buyers won’t get into debt over their heads and lenders will still receive their payments in the case of financial emergency or rising interest rates.
Obviously, for many potential borrowers, it is more difficult to qualify for a mortgage than it used to be.
What’s Happening with the Mortgage Stress Test in 2020?
After the stress test was introduced, the real estate market slowed down in many areas. Some industry professionals began to agree with consumers that the stress test is too tough. In December 2019, the Liberal government made headlines with the announcement that they would be reviewing the borrower stress test and its effect on buyers.
- The government announced they would review the Stress Test
- Interest rates aren’t at the lowest they’ve been in the last decade, but they are still moving downward.
- Big Banks, starting with TD, are beginning to cut their posted rates
Are all of these factors pointing to a less stringent stress-test in the near future? Only time will tell.
Since the higher qualifying rate does accomplish its goal of preventing Canadians from taking on debt that they will be unable to manage, it’s improbable that any potential changes will be drastic.
While we watch the news to see what happens with the stress test, we can be fairly sure of one thing. Change within the mortgage industry will continue throughout this year and the rest of the 2020’s.