Photo: Tierra Mallorca/Unsplash

It took a while.

The mortgage stress test that policymakers introduced in January 2018 has undeniably cooled the Canadian housing market — but homebuyers are adjusting to stricter standards, one expert suggests.

“Home prices and the economy are stabilizing, interest rates are dropping and each day that goes by, incrementally more people adapt to the stress test,” Robert McLister, founder of mortgage-finding website RateSpy, tells Livabl.

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The upshot? Borrowers are coming out of the woodwork.

“So mortgage growth should pick up in the balance of this year, especially if the bank-controlled stress test rate drops. The stress test is the #1 factor currently weighing on mortgage growth,” he adds.

The Bank of Canada qualifying rate, an average of the posted five-year fixed rates from the country’s six biggest banks, has remained atypically high, McLister suggests.

That’s a headwind for the mortgage rate, because the qualifying rate is one of the thresholds for the stress test that took effect a year and a half ago.

Either insured mortgage borrowers have to qualify at this rate, or two percentage points above their contract rate, whichever is higher.

McLister notes that the qualifying rate, which is 5.34 percent, normally follows five-year bond yields — but that hasn’t been the case recently, although contract rates have hit multi-year lows.

Bond yields have trended meaningfully lower this year, yet posted rates only recently began ticking lower.

“It’s virtually unprecedented,” says McLister.

“To date, bond yields are down 90 basis points since early November. Yet, banks are holding buyers hostage by refusing to drop their posted 5-year fixed rates in parallel with actual rates,” he adds.

A 10-basis-point drop to the mortgage qualifying rate boosts a typical homebuyer’s buying power by 0.9 percent, McLister estimates.

There are a few possible reasons banks have bucked the trend and stood firm on rates.

Policymakers may be pressuring the big banks to keep posted rates at current levels. Officials have denied doing so, says McLister, who goes on to point out that former Canadian Finance Minister Jim Flaherty did just that.

Two other reasons have to do with profit. “Banks don’t like to reset rates on mortgages that are in their pipeline, ready to close,” says McLister.

Also, banks use the spread between contract rates and posted rates to determine penalties, such as those that borrowers rack up if they pay off their mortgage early. The wider the gap, the greater the penalty.

“Obviously that’s a significant amount of revenue for the big six banks,” he adds.

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