Stress Test Changes – Be Informed

Ever since the B-20 rules came into effect at the end of 2016, economists and mortgage specialists have voiced that the current qualifying rate attached to the 5 years posted rate imposes too strict of a “stress test” to home buyers. The initial intent of the Stress test and thus the Qualifying rate, was for the Government to ensure that borrowers would eventually be able to face any economic downturn that might arise in the future, such as interest rate increases (the big concern), loss of income or increase expenses. Well, finally last week, the Finance Minister announced some relief. The new rule will be based on a much more market representative benchmark in the “weekly median 5 yr fixed rate on insured mortgages + 2%”. It’s a mouth full when trying to slip that into a conversation, not to mention if it needs to be explained to a potential borrower. As a Qualifying rate, it is better aligned with market conditions, however, it is more complicated to understand for the average consumer. Median rate… not obvious. Is that the same as average? Insured mortgage once again needs explanation for any first-time home buyer. Weekly… where do we go to get this weekly posting? Put simply, the new qualifying rate will be based on the current contract rates submitted to mortgage insurers… last week. All this adds up to a huge opportunity for Mortgage Brokers to reach out to potential clients and offer their valued advice to navigate all these regulations. The Minister announced that it expects the new Qualifying rate for insured mortgages will be set at 4.89% (down 0.30%) as of April 6th. Furthermore, OSFI has indicated that it would also follow suit in stepping away from its current rule (higher of contract rate +2% and posted rate) and use the same Qualifying rate. The “pros” The decrease of 30bps will give borrowers access to an extra 5% borrowing capacity. Clearly, this helps. General consensus is that the current Qualifying rate based on the avg 5 yr fixed Posted rate of the Big 6 banks was setting the bar too high. We could say that the big bank priorities were not aligned with the real estate and mortgage markets. This concern is addressed. The new Qualifying rate will be much more in line with current market conditions AND be dynamic AND take into account rates offered by the other mortgage lenders in the market. This is a much more “democratic” approach and it should fluctuate with the market. “Weekly median fixed rate on insured mortgages + 2%”. It is definitely better aligned with market conditions. The ”cons” This stimulation could drive prices up and in a thriving market the Finance Minister might have to do more if he wants to help the average Canadian – A good message to deliver to customers who are thinking about buying is not to wait! A dynamic and fluctuating rate also means it could potentially change every week. It’s a bit more to manage. Broker agents are going to have to stay informed every week. Although the changes have been announced, some details remain to be clarified. Firstly, will the median rate be the result of CMHC insured mortgages alone? Or will the mortgage contracts going to Genworth and Canada Guaranty also be part of the calculation? Secondly, how volatile will that median rate be from week to week. Will Finance indicate a rate change if the median fluctuates 1 bp? 2 bps? etc. Or will it wait for the rate variation to hit a 5bps before triggering the Qualifying rate change? Let’s not forget, a change in the Qualifying rate does have some operational implications. System calculators need to be adjusted, communications need to be sent… Thirdly, if my client qualifies with this weeks rate, but I don’t finalize the loan approval and the Qualifying rate increases to a point that he no longer qualifies, does the original qualification hold or not? Many important questions for which we have no answers yet. In the end, this regulatory change is a step in the right direction, however considering the market is driving home prices up it might not be enough to have a significant impact in offering much relief to new home buyers.