When Canada’s federal government introduced its mortgage “stress test,” requiring homebuyers to qualify at rates significantly higher than their loan rate, the aim was ensuring they could make their payments as interest rates rose.
As with all policy decisions, however, there have been unintended consequences. According to Toronto mortgage broker Deepak Bansal, for example, first-time buyers and new Canadians are being hit hardest, even when their home-buying aspirations are modest.
Typically, he says, these two demographics start the home-buying process with a plan to save the down payment they need to get onto the first rung of the real estate ladder. “A year or two years go by, they’re ready to purchase, they have the down payment, nothing has really changed in their income. But the qualifying method has changed. The stress test can reduce their purchasing power by about 18 to 20 per cent, which is huge,” he says.
In the Toronto area, the stress test has failed in its secondary aim, putting the brakes on rapidly rising housing costs, and buyers find that prices have also gone up while they’ve been saving.
Many of the new clients who reach out to Mr. Bansal are disheartened, reporting that the mortgage advisers at their banks have told them they no longer qualify because the rules have changed. “What the banks don’t tell them, in most cases, is that there are other options out there,” he says. “There are many lenders with variations in their underwriting guidelines that help reduce the impact.”
He points to credit unions as an example. “Their mortgages are provincially regulated and follow different rules.”
Variations among the underwriting rules of the federally regulated major banks can also create different outcomes, he adds. One couple Mr. Bansal recently received a call from had been saving for their down payment since their arrival in Canada about a year ago. “They called me in a panic because they’d put an offer on a home, with a five-day financing condition, and were declined by their bank on the morning of the fifth day. They were heartbroken. It was a dream home for them – it had everything on their wish list, including proximity to their work and their child’s school.”
Five hours later, with Mr. Bansal’s help, the couple’s application was approved by another major bank, at a lower rate than the one for which they’d originally been preapproved. “Both banks apply the stress test, but the second bank had different rules that allowed the inclusion of income such as commissions. That brought their debt ratios in line and allowed them to qualify,” he explains.
Seeing a mortgage professional with access to multiple lenders 12 to 24 months before buyers plan to purchase provides the best chance of qualifying for the right mortgage, he stresses. “There’s no fee and a broker will help you put together a plan. The banks won’t help you find another lender – that’s not their business model. But there are other options out there.”
Sponsor content feature produced by Randall Anthony Communications. The Globe’s editorial department was not involved in its creation.