It happens every time, she says. The first thing Vancouver mortgage broker Patricia Collins gets asked when she sits down with clients is, “Can I pass the stress test?”
“The first question used to be about rates,” but now, “the topic has been replaced by the scary stress test.”
Regardless of your view on whether the latest stress test is helping or hurting home buyers (by making sure they can handle a two-percentage-point uptick in interest rates), and whether it is sufficiently curbing some of the excesses of the housing prices in the hottest markets (chiefly, Toronto and Vancouver), it has clearly changed the conversation on the street, or at least in mortgage brokers’ offices.
Under the new stress test introduced at the start of 2018 by the country’s banking regulator, a home buyer qualifying for a new, uninsured mortgage (in other words, who has made a down payment of 20 per cent or more) must be able to afford a mortgage with an interest rate that is two percentage points higher than the actual rate – or the five-year benchmark rate from the Bank of Canada, whichever is higher. So, if the interest rate on a typical five-year fixed mortgage is, say, 3.74 per cent a year, the home buyer would have to be able to afford 5.74 per cent in order to qualify (even though the home buyer would still only have to pay 3.74 once approved). For insured mortgages, the rules are a little different.
Because of this stipulation, the purchasing power of the home buyer is effectively lower, brokers say.
They use the example of a buyer budgeting for, say, a $1-million home; they are now only able to qualify for approximately an $800,000 home.
“Sometimes I’ll work with someone for years before they purchase. They might have gotten preapproval from me two years ago. And they’re, like, okay, I’m finally ready. I’ve paid off my debt. I’ve calmed my nerves. Now’s the time, I’m going to look. But now, the mortgage I approved them for is going to be $200,000 less. That’s huge,” Ms. Collins says.
She adds another scenario. She had clients who were already in the market and selling their home, and because their income had risen over the years, they figured they could afford a new home at a similar or higher price. But that assumption may not be true, given the higher bar they need to clear with the stress test. “They could find themselves in a situation where they’re not even going to qualify for a lateral move,” she says.
In other words, the astronomical sale prices of a Vancouver home may not be enough for a client to buy another astronomically expensive Vancouver home, plus handle the stress test. “I don’t want you to sell and be in this disappointing position. It might be fine, but let’s really sit down and run the numbers,” Ms. Collins says.
Evan Siddall, the head of Canada Mortgage and Housing Corporation, the federal mortgage insurer, has argued that the stress test has, in fact, helped buyers by easing home prices, particularly in Vancouver and Toronto, while also helping buyers avoid finding themselves seriously struggling when rates rise. Also, Mr. Siddall has stressed that, just as rates rise, housing markets can easily fall, and so the stress test is a buffer to help people from buying more than they can afford.
But from the perspective of some, the stress test just adds another burden in an already difficult, if not impenetrable, housing market. “Rates are going up, and the stress test doesn’t help. It’s a perfect storm for first-time home buyers. They feel, ‘How am I going to be able to collect and save for a down payment when I’m paying $2,500 for my rent for a one bedroom?’” argues Kim Gibbons, a mortgage broker in Toronto.
She adds that first-time home buyers “are being forced out of the city. They are being forced to commute to downtown Toronto, if that’s where they work. So, they are looking at places in the Greater Toronto Area, Hamilton, Ajax, Pickering.”
As the debate continues, the stress test has changed people’s options when discussing mortgages.
“In our business, there is a lot more strategizing around the ultimate goal," says Nishka Riley, a mortgage broker in North Vancouver. “If the client comes to me, and the ultimate goal is to own a house, we do have conversations around if it’s viable to continue renting and saving money, or maybe buying a condo and using it as a stepping stone, to the ultimate goal of owning a house or a townhouse,” Ms. Riley says.
She opposes the new regulation. “An average person who is buying an investment property is not impacted by the stress test. It’s really the first-time home buyers and young families, which is heart-breaking.” Her own business, however, has not suffered in the continually busy Vancouver market. “We don’t rely just on transactions from purchases. We also have clients whose maturities are coming up, who are refinancing,” she said.
In recent months, there have been rumours about whether federal regulations may again change, such as allowing insured mortgages for first-time home buyers to once again have an amortization of 30 years, longer than the current limit of 25 years. The industry will be looking for the release of the new federal budget Tuesday for possible changes.
And in Vancouver, for instance, this comes on top of home owners and buying looking at the impact that taxes are having on speculative buyers and empty homes.
“They kind of hit it with multiple fronts at once, with the taxes, as well. Everybody is sitting back, waiting to see if they would reel [taxes and regulations] back,” Ms. Collins says. “But my phone is ringing off the hook. I think people have more anxiety because of it, but I don’t know if that’s preventing them from purchasing.”
She adds: “It might just affect what they can purchase. I don’t think they would say, ‘We’ll rent for another year because of the stress test.’ But it might mean 200 square feet less, or East Van instead of the west side."