The chorus from the "Chicken Littles" that the sky is falling on Canadian housing markets is getting louder and is, in fact, out of tune with reality, says Dwight Trafford, principal broker at The Mortgage Centre in Orangeville, Ontario..Trafford isn’t shy about pointing the finger at the "chickens.".“The fear that is being written by the media, that clients cannot afford the higher rate mortgages, is unfounded because of the stress test,” he says. .Damn media — The Western Standard excepted..The sky is not falling, but the dynamic that drove housing markets over the last two years, extremely high demand, has changed. Add in out-of-control inflation and the result is a correction taking place in most markets in Canada..And that’s how the supply/demand dynamic is supposed to work: rising demand = rising prices; lower demand = lower prices..And, as Trafford says, there is the stress test, plus the Canada Mortgage and Housing Corporation’s mortgage insurance, standing as guardians against a complete collapse..CMHC insurance is mandatory with less than a 20% down payment. On a $500,000 home purchase and 15% down ($75,000) the insurance is $11,900, as a lump sum payment or over the life of the mortgage. If a homeowner defaults, the insurance covers the mortgage balance..CMHC does good business. .From its annual report for the 2020 fiscal year: “Revenue from our commercial activities, Mortgage Insurance and Mortgage Funding, was $3 billion, generating a net income of $1.7 billion.” .In addition, CMHC receives $5 billion of taxpayers’ money through the federal government..And then, as Trafford says, there is the stress test, which is calculated by the Office of the Superintendent of Financial Institutions (OSFI)..OSFI introduced the stress test as a hedge against mortgage rates rising higher than the rate for which homebuyers qualified, based on their individual financial situations..The calculation is simple: You must qualify for a mortgage at the contract rate offered by a federally regulated lender plus 2% or 5.25%, whichever is higher..All Canadians who are either applying for a new loan or renewing an existing one must show they can qualify under the stress test guidelines (unless renewing with the original lender). .The debate whether OSFI could, or should, adjust the stress test rate to qualify for a mortgage has begun, as it does when housing markets fluctuate..In May, OSFI’s deputy superintendent of supervision, Ben Gully, said there were no plans in place to change its qualifying rules, but added OSFI was open to revisiting the stress test level before the end of the year “if conditions change.”.Normally, OSFI makes a stress test announcement, although just this week, it announced changes that affect combined loan plans (CLP), loans with shared equity features and reverse mortgages..“The most significant concern with these products is the re-advanceability of credit above the 65% loan-to-value (LTV) limit. Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households,” said OSFI in a statement..In the current environment, borrowers are having to qualify at far higher levels than before, with recent rate increases meaning their contract rate plus 2% is almost always higher than 5.25%..That is pushing would-be buyers — either new or move-up — out of the market or to look for lower-priced homes..Len Lane, president and broker of record at Edmonton-based Real Life Mortgage Solutions says it’s obvious the stress test has served its purpose of protecting Canadians against higher borrowing costs. He agrees the test should be revisited, but “there are no easy answers on what any potential revision should entail.”.“If rates are going to continue to climb for the next two years, then many will find that renewing their mortgage may come with a huge sticker shock,” Lane told Canadian Mortgage Professional. “So do you lower it and now put buyers in jeopardy of buying more than they can actually afford, or do you remove it and just let the chips fall where they may in the future?”.Trafford says the stress test made sense when rates were at their lowest at the height of the COVID-19 pandemic, adding the test’s time has passed with fixed rates set to move above 6% in the coming months..“The stress test may still be reasonable on variable-rate mortgages with substantial discounts below prime,” says Trafford. The test’s "continued existence means much of the current doom and gloom about the housing and mortgage market could be exaggerated.”
The chorus from the "Chicken Littles" that the sky is falling on Canadian housing markets is getting louder and is, in fact, out of tune with reality, says Dwight Trafford, principal broker at The Mortgage Centre in Orangeville, Ontario..Trafford isn’t shy about pointing the finger at the "chickens.".“The fear that is being written by the media, that clients cannot afford the higher rate mortgages, is unfounded because of the stress test,” he says. .Damn media — The Western Standard excepted..The sky is not falling, but the dynamic that drove housing markets over the last two years, extremely high demand, has changed. Add in out-of-control inflation and the result is a correction taking place in most markets in Canada..And that’s how the supply/demand dynamic is supposed to work: rising demand = rising prices; lower demand = lower prices..And, as Trafford says, there is the stress test, plus the Canada Mortgage and Housing Corporation’s mortgage insurance, standing as guardians against a complete collapse..CMHC insurance is mandatory with less than a 20% down payment. On a $500,000 home purchase and 15% down ($75,000) the insurance is $11,900, as a lump sum payment or over the life of the mortgage. If a homeowner defaults, the insurance covers the mortgage balance..CMHC does good business. .From its annual report for the 2020 fiscal year: “Revenue from our commercial activities, Mortgage Insurance and Mortgage Funding, was $3 billion, generating a net income of $1.7 billion.” .In addition, CMHC receives $5 billion of taxpayers’ money through the federal government..And then, as Trafford says, there is the stress test, which is calculated by the Office of the Superintendent of Financial Institutions (OSFI)..OSFI introduced the stress test as a hedge against mortgage rates rising higher than the rate for which homebuyers qualified, based on their individual financial situations..The calculation is simple: You must qualify for a mortgage at the contract rate offered by a federally regulated lender plus 2% or 5.25%, whichever is higher..All Canadians who are either applying for a new loan or renewing an existing one must show they can qualify under the stress test guidelines (unless renewing with the original lender). .The debate whether OSFI could, or should, adjust the stress test rate to qualify for a mortgage has begun, as it does when housing markets fluctuate..In May, OSFI’s deputy superintendent of supervision, Ben Gully, said there were no plans in place to change its qualifying rules, but added OSFI was open to revisiting the stress test level before the end of the year “if conditions change.”.Normally, OSFI makes a stress test announcement, although just this week, it announced changes that affect combined loan plans (CLP), loans with shared equity features and reverse mortgages..“The most significant concern with these products is the re-advanceability of credit above the 65% loan-to-value (LTV) limit. Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households,” said OSFI in a statement..In the current environment, borrowers are having to qualify at far higher levels than before, with recent rate increases meaning their contract rate plus 2% is almost always higher than 5.25%..That is pushing would-be buyers — either new or move-up — out of the market or to look for lower-priced homes..Len Lane, president and broker of record at Edmonton-based Real Life Mortgage Solutions says it’s obvious the stress test has served its purpose of protecting Canadians against higher borrowing costs. He agrees the test should be revisited, but “there are no easy answers on what any potential revision should entail.”.“If rates are going to continue to climb for the next two years, then many will find that renewing their mortgage may come with a huge sticker shock,” Lane told Canadian Mortgage Professional. “So do you lower it and now put buyers in jeopardy of buying more than they can actually afford, or do you remove it and just let the chips fall where they may in the future?”.Trafford says the stress test made sense when rates were at their lowest at the height of the COVID-19 pandemic, adding the test’s time has passed with fixed rates set to move above 6% in the coming months..“The stress test may still be reasonable on variable-rate mortgages with substantial discounts below prime,” says Trafford. The test’s "continued existence means much of the current doom and gloom about the housing and mortgage market could be exaggerated.”
