Earlier this month, the Canadian Home Builders’ Association released the results of a member survey in an effort to assess the effects of the national mortgage stress test. It comes to no surprise that buyers are experiencing issues qualifying for a mortgage.
It’s now been more than a year since the stress test came into effect. The policy requires that you qualify at 2% higher than your agreed upon rate with your lender. This test applies whether you put down more or less than 20% on the home.
Through 2018, home prices moderated and sales slowed down quite a bit compared to the extremely busy 2017. The problem now is that home prices are still out of reach for many in certain markets across Canada, like in Ontario and British Columbia, and interest rates are higher. The changing conditions are causing some in the industry to call for a revisiting of the stress test parameters.
According to CHBA’s survey results, 90% of builders and developers reported that their customers had a more difficult time qualifying for a mortgage in 2018 compared to the previous year. There was also an increase in purchase agreements failing due to financing problems among 84% of builders.
The most concerning finding to us was that the builders reported a 33% drop in first-time buyers. In general, young first-time buyers are the ones with lower budgets and lower salaries, so of course needing to qualify at 2% higher than their rate is a significant blow to their borrowing power.
“We know why the stress test was put in place, but given that economic and housing market conditions have changed, and considering the impact that all of the mortgage rule changes have had on first-time buyers, we do think it’s time for some policy adjustments,” says CHBA CEO, Kevin Lee.
There are two things the CHBA suggested: restoring the 30-year mortgage for first-time buyers, and revisiting the stress test, perhaps lowering it by a few basis points.
With higher rates, we think it’s a given that the stress test should drop down to 1% or at least 1.5%. We also think the game changer might be the 30-year mortgage for first-time buyers. Odds are, most first-time buyers aren’t buying their forever home, so lowering monthly carrying costs is a priority. If they can add five more years to their mortgage and save a few bucks a month, it would make a big difference.
When a lender is reviewing a mortgage application, they want to see that your monthly shelter costs like hydro, condo fees, and property taxes, plus your mortgage payments, aren’t exceeding 30% of your before-tax monthly income. The longer amortization will help lower the greatest monthly cost for every first-time buyer.
So far, we haven’t heard anything about the stress test being adjusted, but we’re eager to see if either of these two changes are even considered by the federal government.