During last year’s federal election, the stricter mortgage rules introduced by the Trudeau government were a hot debate topic when it came to the issue of affordable housing.
The Progressive Conservatives under Andrew Scheer made headlines for their proposed modifications to the Liberal policy that, in 2018, introduced mortgage stress testing for uninsured mortgages, which require a minimum downpayment of 20 percent. The test requires borrowers to qualify at a rate either 200 basis points higher than what their lender is offering, or the Bank of Canada’s benchmark rate (currently 5.19 percent), whichever is higher.
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While critics took issue with many prongs of the test — the need to requalify when switching mortgage lenders, for one — the fact that it appeared to set an unnecessarily high bar for homeownership, especially in expensive markets like Toronto and Vancouver, was the critique that got the most traction.
With buyer activity in steep decline in the year following the policy’s introduction, it was clear that it would take some time for the market to adjust to the more stringent requirements.
Now, two years later, the market has certainly taken its time to adjust and homebuying activity is on the rise again in markets hit hardest by the rules, with Toronto and Vancouver being the most obvious examples.
That’s an encouraging sign, but the Liberal government, now a minority in Parliament, seems to have bowed to some of the election year stress test criticism. Minister of Finance Bill Morneau and the Office of the Superintendent of Financial Institutions (OSFI) announced earlier this month that two modifications were in the works for the existing stress test.
The proposals, which have yet to be made official, would change the qualifying rate for high loan-to-value ratio insured mortgages and uninsured mortgages. The new qualifying rate would be the median five-year mortgage rate from lenders in the previous week plus 200 basis points. According to research firm Capital Economics, the qualifying rate would be 4.89 percent (as opposed to 5.19 percent) if the rules were applied today.
“While the actual 0.3% difference might not sound like a lot, it would still increase the amount that a stress-test-constrained buyer could borrow by 3.1%,” wrote economist Stephen Brown.
In a high-priced market like Toronto, those percentages add up. The changes are set to take effect on April 6th, unless the stakeholder feedback being gathered now causes the Department of Finance and OSFI to reconsider.
Even though this change will benefit homebuyers looking to take on larger mortgages in the short term, in the long run, they may see their buying power shrink under the new rules. Mortgage rates offered by major lenders have declined over the last year and a half, making the current median rate used to qualify mortgage applicants under the stress test lower than the benchmark rate.
However, an analysis by Capital Economics found that since 2012, the stress test qualifying rate would have been slightly higher on average with the new rules than the Bank of Canada benchmark rate used under the old rules.
“OSFI may have found a clever way to appease politicians hankering for a less onerous stress test while keeping the Bank [of Canada] on side,” wrote Brown.
“If we assume that the median five-year insured rate offered by lenders has historically matched the average discretionary rate tracked by [rate comparison site] RateSpy, as it does today, then since 2012 the qualifying rate under the new proposals would have averaged 10 basis points more than the rate under the original rules. It would have also increased faster after the Bank began raising interest rates in 2017,” he said.