Despite a collective call from the mortgage and real estate industries for changes to the mortgage stress test requirements, the federal government has been opposed to any type of stress test review. That is, up until now.
In December 2019, after parliament convened following the federal election, and perhaps as a result of a minority government, Prime Minister Justin Trudeau indicated that one of his priorities for Finance Minister Bill Morneau was to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”
The mortgage stress test qualification rules came into effect more than two years ago now – January 1st, 2018. Implemented for federally regulated lenders, the stress test was created to help alleviate overheating housing markets and reduce risky borrowing practices by protecting consumers should interest rates rise. While acknowledging that some form of stress testing should exist, industry sentiment is that the negative impacts have eclipsed the intended purpose.
The Stress Test
Essentially, a stress test requires borrowers to qualify for a mortgage at a higher interest rate than the actual rate they would be paying. While the intention of the federal rules seemed sound, they have adversely resulted in reduced borrowing capacity. Many would-be buyers have been priced out of the marketplace, with the most affected category being first-time homebuyers.
Existing mortgage holders have also been affected. At the time of renewal, the only way to avoid facing the stress test for uninsured mortgage borrowers is if they maintain their mortgage with their current lender. If, however, they want to move their mortgage to a different lender, one offering a better rate, for example, they would be forced to qualify using the stress test.
This has cast a shadow of doubt on the government’s intention of promoting consumer choice and competition, by forcing people to stay with their current lender even if a better option exists elsewhere.
*Exception to the rule:
It’s important to note that if you purchased a home using an insured mortgage prior to November 2016 (when the stress test came into effect for this borrower type) and you have a mortgage coming up for renewal, then an alternate option exists. I can qualify you using the contract-rate instead of the stress-test-rate when you’re switching to a new lender.
Why a Review is Important
While it remains to be seen whether any significant modifications will be made, industry groups view the decision for a review as a step in the right direction.
As an aside, the Conservative Party of Canada, in its pre-election platform, announced it was committed to addressing the mortgage stress test issue. As a result, any possible changes put forth by the Liberals will likely not be faced with opposition.
Among minister Morneau’s mandate for implementing the government’s fiscal plan is the need for continued investment in “people and in the things that give people a better quality of life”. Owning a home can be described as one of life’s most significant achievements and actually helps define our quality of life. As such, helping and not hindering Canadian consumers to become homeowners should always be a priority for government decisionmakers.
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