March 31, 2019 Kristen Godel

Mortgage Stress Test

The mortgage stress test has been… well, stressful to say the least. Stressful for banks trying to meet targets, stress for mortgage brokers trying to get financing for clients, stressful for realtors and home owners and even stressful for young buyers who were eventually looking to get into the market! The term ‘mortgage stress test’ wasn’t meant to mean “stressful to homebuyers/homeowners”, but that seems to be reality of what it’s caused. Really, the term meant to “stress” the debt servicing ratios thus forcing buyers to purchase well within their comfort zone. The rule has decreased affordability by 20% across the board and as a result, if this is even an option, people in the market are resorting to multiple co-signers, significantly larger down payments from gifted/borrowed funds and most impactfully, changing up their plans entirely to buy a home outside of their original goal in the first place.

What’s going to happen moving forward (February 2019 – onward): Well, hopefully some leniency on the mortgage stress test! Wishful thinking maybe, but there’s a ton of pushback from the Real Estate board, economists and industry related professional (like ourselves!). These ‘calls’ on Ottawa to lay off a little are being heard, but we’ll have to wait to see what happens in the year ahead.

The biggest impacts of the mortgage stress test thus far:

First time home buyers: First time home buyers that just missed the mark are now subject to the stress test rules. Their affordability, as a result, is now approximately 20% less than it was prior to the rule change. This is a big deal, and for many, has postponed their purchase until things settle down. The simplest way to put this is, the mortgages stress test has phased out a significant percentage of the population.

Existing home owners: Existing home owners are affected by the mortgage stress test too. This new rule backs owners into a corner at maturity/renewal of their existing mortgage. The mortgage they once qualified for may not be affordable under the ‘stress test’ rules if they decide to shop around for rates with other banks (as doing so would require re-qualification under the new rules). Well where does this leave many existing home owners? Stuck, that’s where. Your existing bank is surely happy about this at their retention rates are through the roof. Less competition = less flexibility on rate.

Sellers: No more bidding wars, sorry home owners. As a seller, you can expect longer days on market, the increased likelihood to decrease price after exposure on the market, and the increase risk of the buyers not following through on financing forcing you to re-list the home. Now hopefully that isn’t the case of course as the market in still relatively strong (historically speaking), but the mortgage stress test has only heightened these possibilities. Oh yes, and let’s not forget that homes won’t sell nearly as high as they were in 2017. On average, homes are being appraised at close to 10% under 2017 values.

Builders: Contractual defaults! Buyers committing to a pre-construction property are greatly overestimating their affordability. As a buyer in this market, it is necessary to be pre-qualified and comfortable with your purchase. Yes, there has been an influx of contractual defaults as a result of buyers not being able to follow through on financing. This means lost deposits, possible legal costs and roadblocks in personal plan/goals. Not pretty – we want to help avoid this.

We’ll report again mid year with updated on the mortgage stress test. In the meantime, if you have any questions regarding this please call us at (905) 455-5005.