Pol­icy-mak­ers must re­assess stress test

It is hurt­ing po­ten­tial first-time home buy­ers

Calgary Sun - Homes - - Homes - PAUL TAY­LOR

Pol­icy mak­ers in Canada need to re­assert sup­port for would-be first-time home buy­ers, not make home­own­er­ship more dif­fi­cult. Home­own­er­ship should not only be avail­able to the for­tu­nate few. The health of our long-term econ­omy de­pends on it.

In re­cent years, the fed­eral Min­istry of Finance and the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions (OSFI) have in­tro­duced new rules and reg­u­la­tions meant to re­duce in­ter­na­tion­ally per­ceived risks to the Cana­dian hous­ing mar­ket and bank­ing sys­tem. Among those are the stress tests home buy­ers now face. If you’ve shopped for a mort­gage re­cently, you very likely know about these stress tests.

To­day, typ­i­cal five-year fixed mort­gage rates are roughly 3.5 per­cent, how­ever, be­cause of these re­cent rules — the lender has to test your abil­ity to pay at a higher rate — 5.34 per­cent or even higher. Ef­fec­tively, these new rules cre­ated a roughly 20 per­cent re­duc­tion in bor­row­ing power for Cana­di­ans. This can im­pact many home buy­ers, but dis­pro­por­tion­ately im­pacts first-time buy­ers, even those for­tu­nate enough to be able to ac­cess the Bank of Mom and Dad.

That 20 per­cent bor­row­ing power re­duc­tion is con­tribut­ing greatly to a sig­nif­i­cant re­duc­tion in would-be home buy­ers en­ter­ing the mar­ket. Real es­tate trans­ac­tion num­bers across Canada also show the ef­fects: The Cana­dian Real Es­tate As­so­ci­a­tion’s most re­cent 2018 fore­cast is for $462,900, ver­sus $513,280 in 2017. That’s a roughly 10 per­cent drop.

There’s no doubt mort­gage lenders need to en­sure their bor­row­ers will be able to han­dle higher in­ter­est rates in the fu­ture. How­ever, many po­ten­tial buy­ers, who would be ca­pa­ble of meet­ing their longterm obli­ga­tions, are be­ing pre­vented from mak­ing choices that would be in their best long-term in­ter­est. For­tu­nately, in our re­cent dis­cus­sions in Ot­tawa, MPs and pol­icy mak­ers seem to agree that some relief is nec­es­sary.

We ask of­fi­cials to con­sider the fol­low­ing: Rather than hav­ing the qual­i­fy­ing rate con­tin­u­ously move, set a fixed min­i­mum mort­gage qual­i­fi­ca­tion rate of five per­cent for both in­sured and unin­sured mort­gages. This is more than 1.5 per­cent above cur­rent mar­ket rates, en­sur­ing a buf­fer in Cana­di­ans’ bud­get­ing if rates con­tinue to rise, main­tains a safe floor if rates fall, but al­lows mar­ket in­ter­est rates to func­tion with­out ad­di­tional reg­u­la­tory bur­den if rates nat­u­rally rise above five per­cent. Ris­ing in­ter­est rates au­to­mat­i­cally ad­versely af­fect home prices; they re­duce bor­row­ing power, which re­duces the num­ber of buy­ers. Ar­ti­fi­cially stress­ing the rate ex­ac­er­bates this, dis­qual­i­fy­ing younger Cana­di­ans and cre­at­ing a rich get richer en­vi­ron­ment where prop­er­ties are on sale for the well cap­i­tal­ized.

For bor­row­ers whose five-year mort­gage term is re­new­ing, and who have con­sis­tently and cor­rectly paid their mort­gage as agreed, an ex­emp­tion to re-qual­i­fi­ca­tion should be granted if they wish to switch lenders at re­newal.

Some Cana­di­ans who pre­vi­ously qual­i­fied un­der the old rules may oth­er­wise find them­selves un­able to shop the mar­ket and be there­fore forced to pay the in­ter­est rate of­fered by their cur­rent lender, of­ten not the most com­pet­i­tive.

If no re­fi­nanc­ing is re­quired, re­strict­ing bor­row­ers to a sin­gle re­newal op­tion is not just anti-com­pet­i­tive, but anti-con­sumer.

Sim­ply put, if your mort­gage is up for re­newal, and you’ve al­ways been on time with pay­ments and aren’t ask­ing for new money, you shouldn’t need to face a stress test to shop around.

For would-be first-time home buy­ers, who gen­er­ally have less than a 20 per­cent down­pay­ment and there­fore re­quire mort­gage in­sur­ance, we ask for a 30-year amor­ti­za­tion op­tion to be once again made avail­able to them. Fol­low­ing the con­tin­u­ous re­stric­tions to lend­ing prac­tices since 2009, many young Cana­di­ans need now more than ever some as­sis­tance to af­ford that first prop­erty and build eq­uity for their own fi­nan­cial fu­ture.

Our as­so­ci­a­tion is com­posed of mort­gage bro­kers, lenders and in­sur­ers. As such, we staunchly ad­vo­cate pru­dent lend­ing, un­der­writ­ing and bor­row­ing. We also ad­vo­cate for a grow­ing econ­omy, know­ing that home­own­er­ship is di­rectly cor­re­lated to in­di­vid­ual eco­nomic well-be­ing. The re­cent rules to cur­tail mort­gages were well-in­ten­tioned, but they are now sti­fling the growth of a new mid­dle class. They need re­vis­ing, sooner rather than later.

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