The Mortgage Stress Test is hurting Canadian homeowners
As of January 2018, Canadian homeowners have been finding it harder to qualify for a mortgage, thanks to the mortgage stress test.
The mortgage stress test is a federal government regulation recently put in place which has slowed down the rate of Canadians who have been able to qualify for a mortgage. To pass the stress test, a borrower needs to qualify for a mortgage rate that is 2 per cent higher than their actual rate. That means they’re going to need more income to qualify for the same mortgage today than they did last year, or, they remain stuck with their current bank, limiting their banking flexibility, and ultimately, creating less competition and more money for the banks.
To pass the stress test, a borrower needs to qualify for a mortgage rate that is 2 per cent higher than their actual rate.
The stress test is already showing its effect on the real-estate market, laying a potential protection lock on this industry(remember the housing market crash of 2008 in the U.S.?). The real estate market predicts that if interest rates rise while incomes stay put, this will create tons of mortgage defaults. However, “mortgage defaulting”, the cause of the housing market crash in the U.S., is treated differently in Canada.
When the economy tanked and hundreds of thousands of homeowners in the U.S. couldn’t afford to make their mortgage payments, a lot of them either walked away from their home or sent the keys back to their lender (what came to be known as “jingle mail”). In a handful of states, lenders have no recourse for those borrowers to recover the money that they lost from those unpaid mortgages.
In most provinces in Canada, this is not allowed. Sure, you can walk away from your mortgage, but your lender and/or mortgage insurer will come after you for the outstanding mortgage balance, regardless of whether or not you are still physically living in the home. The government also does not take into account the fact that in the US, the loan to value percentages (the ratio of your loan to the value of your property) were not being regulated and companies were creating percentage points over 100 per cent (which means people were borrowing more money than the value of their property).
Typically, interest rates rise when the economy is good. Unfortunately, this does not translate to homeowner wages, because they don’t budge. So the government really isn’t using the right salary to compare homeowner debt against. Let’s think about the logic behind this for a second—is the government saying you’re a danger to the economy if you switch lenders but not if you stay with your current lender at a significantly higher rate?
The government wants to stop borrowers from going to mortgage lenders who charge very high interest rates, yet they are forcing homeowners to keep borrowing from their banks—the moneymakers on the other side of these high-interest rates. The only other option for Canadians who refuse to be locked into their bank is to turn to private mortgage lenders. Private mortgage lenders saw a growth of 9 per cent market share in the second quarter of 2018 (a report from the Bank of Canada mentions). This means, the more Canadians borrow from high- interest lenders, the more their wealth suffers and depresses the economy.
Feel yourself on the short-end of this stress test controversy? We can help you do something about that.
At Cannect.ca, we help borrowers tap into the equity they have in their homes that the government has taken away. Borrow for less at Cannect.ca.
