Adjustments to the “Stress Test” don’t go far enough

In case you missed it, Finance Minister Bill Morneau announced this week that adjustments to the “Stress Test” are coming on April 6th. While the government says the change will make the stress test qualifying rate more responsive to market conditions, what does that really look like?

On the bright side, this new qualifying rate will probably be lower by around 0.30%.  This will increase the amount of a house one can buy by around 5%.  

Example… $500k increases to $525k.  

On the dark side, this isn’t really making a whole lot of difference. I don’t want to sound pessimistic, but I’d like to point out the shortcomings of his announcement. It’s purely political. They said they would do something and I guess, technically they did. But it really has no significant impact. 

What industry experts wanted to see, including myself, is for the stress test to be more in line with realistic interest rates, now and projected. Interest rates have been at or around 3% in the last 6 years. And there’s no indication or expectation that these rates will rise over the next two or even three years. 

The stress test was brought out as a way for the government to ensure that homeowners would not have payment shock come renewal time. The belief was that interest rates could have, or should have gone way up by now.  

Well, that hasn’t happened. And in fact, we believe that this isn’t going to happen anytime soon. Here’s another fun fact that the government hasn’t told you or at least doesn’t want to publicize. Did you know that if your interest rate doubles your payment only goes up by about 34%? Your payment doesn’t double on your mortgage. So for example, if you had a $300,000 mortgage with a 3% as your rate and your payment was $1,420 a month. If interest rates were to double, and of course no one expects that they will or even come close to doubling. But let’s assume for a second that they will double, your payments would only go up to $1920/mth.  

Look at this way… qualifying for a mortgage has become so much more difficult with the government adding around 2.4% (the amount of discount you can get on your mortgage if you went to an experienced mortgage broker). A family earning $120,000 with less than 20% down payment, today, qualifies for a maximum mortgage of around $575k.  

The new adjusted stress test coming out in a matter of weeks will increase that number to $592k. Nothing to get too excited about.  

The real change should have been to go back to the old standard method of qualifying, which is to qualify at your actual contract rate. If we use 3.00% (and most can get lower than this today) you would be able to qualify for a mortgage of $720,000. Now that’s a real change that would improve consumers buying power. 

Remember, if we are using the maximum amortization of 25 years, your payments would be $2800/mth on $592,000 and  $3410 on a $720,000 mortgage. Affordability is there. We just need the govt to get out of the way.  

Oh, one last thing…  why is a 30-year amortization so bad?  This was introduced back in the early 2000’s. It increased to 35 years and 40 years in 2006. Last time I checked, we are living longer and working longer into our late 60’s and early 70’s. Now, I’m not advocating working forever but the numbers have been skewed. The average Canadian has been paying their mortgage off between 12 and 17 years. That info doesn’t get pushed out enough.  We may take longer amortizations but we still pay our debts off early.

My message to the federal government… get out of the way.  Allow more people to buy, allow for more privately owned rental units to come on the market, you will solve the housing crisis and see rents drop. This is so simple. I welcome all feedback and encourage you to push this to your local MP.  We need real change! This token gesture is truly insulting to Canadians intelligence.  

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca