Mortgage Stress Test Reduction…Don’t Get Too Excited

Canada’s mortgage stress test reduction. Although this seems like good news, don’t pack your bags just yet… Let’s examine.

Incredible news, the mortgage stress test reduction. Is it really great news? Not really. On a positive side, it has come down under the psychological level of 5% for the first time since 2018. The stress test is now at 4.94%, down from 5.04%. Although the Canadian mortgage rates are at least trending lower, the new discounted rate does not add up to a lot more affordability for the average Canadian mortgage consumer. In fact, the mortgage impact is minimal.

Canadians ability to have a thriving housing market is based upon many other factors besides the mortgage stress test reduction. Let’s examine these areas to see what is in our Canadian housing picture.

1. COVID-19

This virus has caused destruction not only in our country, but worldwide. Many Canadians have been laid off and have lost valuable income. Psychologically, we are all scared. April sales in housing clearly demonstrated the results. Uncertainty does not lead the average Canadian to buy. Every day we are clearly reminded with companies going bankrupt and the industries like retail, hospitality and restaurants requiring desperate help. Yes, we have strong economic headwinds and I suspect that it will take time to repair the damage.

2. CMHC’s New Proposal

CMHC is considering increasing the down payment amount to 10% instead of 5%. They lower the Canadian mortgage stress test qualifier to 4.94%, yet they want to increase the amount of the minimum down payment? This is a head scratcher, as increasing the amount of the minimum amount needed to buy a house does the exact opposite in terms of affordability. It makes it much harder. The enquire that gets the Canadian housing market going, the first-time home, will have more problems getting started. It is understandable why they are proposing larger down payments to prevent losses but isn’t longer amortizations more desirable as it will allow homeowners to have more affordable payments? Just saying.

3. Lender’s Tightening Underwriting Rules

All lenders are vigilant of the current economic conditions. Consumers may believe that the stress test being lowered will help them but that is only true for the best clients. Getting approved for a mortgage has become much harder with banks scrutinizing income and credit much harder. Income has to be stable and consistent. Credit can no longer be just average. Financial institutions are concerned with losses and they have made adjustments to the approval process to make it harder for approval in spite of the mortgage stress test reduction.

Economic and financial institutions have strong headwinds that unfortunately make the mortgage stress test reduction less desirable. The silver lining is that the qualifying rate has peaked and is slowly headed in the better direction for all mortgages. However, the implications of the new world make it more difficult going forward to establish the thriving housing market we once enjoyed. We will ensure and grow again. We always do.

Robert Floris has been in the mortgage industry for 30 years, including working as a Sales Manager for a major chartered bank. Over his career, he has personally lent over 1 billion dollars and proudly continues to advise and tutor his valuable clients.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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