Canada’s mortgage stress tests seemed excessive last year, but they were insufficient. The recent Bank of Canada (BoC) rate hike pushed a number of variable rate borrowers above their stress test rate. BMO warns these borrowers haven’t been risk-tested for the current environment.
Canadian Mortgage Borrowers Haven’t Been Stress Tested For Rates This High
The stress test is a feature designed to ensure mortgage borrowers can continue to pay, even with higher rates. The rate is 2 points plus your contract rate, or the OSFI test rate—whichever is higher. Not a lot of people were thrilled, with much of the industry arguing the test was excessively steep. Now it’s not enough.
Back in 2021, when mortgages could be had for 1.5%, the stress test rate of 4.79%-to-5.25% is what most were tested against. Great news if you locked in that rate, and continue to get the discount. However, an increasing share of borrowers opted for variable rate mortgages, in exchange for taking on more risk at a discount of 0.2 points. It wasn’t the best decision.
BMO warns the hike made yesterday obliterates the rate mortgage borrowers were tested at. “The Bank of Canada’s 50 bp rate hike will push variable rates further above stress tested rates for many mortgage holders,” wrote Robert Kavcic, a senior economist at BMO.
He warns variable mortgage rate borrowers have seen rates rise 400 basis points (bps). Variable rate mortgage borrowers are likely paying more than they had been tested for. That means borrowers are in uncharted waters, where the current risk reduction scheme insufficiently prepared households.
Canadian Mortgage Borrowers Won’t See The Impact Until Renewal
Canadian borrowers in this situation aren’t having fun, but it won’t be a tragedy either. “Of course, the majority of variable-rate mortgages have fixed-payment features, so they are not being hit with the full force of payment hikes immediately (renewals will be another story),” says Kavcic.
Typically variable rate mortgage payments stay at the same level, and the amount applied to principal is reduced. In some instances, borrowers will reach their trigger rate—where the payment no longer covers sufficient principal payments, and needs to be adjusted.
Lenders often adjust for a trigger rate by increasing the payment, or extending the amortization. It might suck to pay a lot more interest, but it’s definitely not the same as losing your home due to a lack of affordability.
How long mortgage rates settle at this rate will determine the extent of the fallout. “The longer we stay in 5.25%-plus mortgage rate territory, the more the pressure will build,” the bank warns.
What has caused this issue is a lack of financial literacy for Canadians. Many of us, from the older generations, have paid 11% mortgages and know that any rate of 5-6% would be considered a “median” lifetime rate. For example, in 1966 my father took out a 20 year mortgage at 5%. None of these 5-year rates currently posted are outrageous. The problem is that consumers in the last 5 years came to expect that historically low rates would be the norm and made buying decisions based on this. What is worse is that they paid the highest prices in history for their homes. While I feel for them, I can’t help but wonder why history has not taught us that what goes down, eventually goes up!
Mark, don’t be one side being. In 1966 when the interest rate was @ 11% how much was the house going for in the market?
People won’t mind paying 15% mortgage in as much the house prices are below $50000.
Cause & effect.
30+ years of declining interest rates (14 years of which where BoC olr was sub-2%) caused RE prices to rise (an inverse relationship).
Financially illiterate and/or speculating CDNS continued to bid up prices based on temporary renewable 5-yr mortgages asnif they were comparable to US 30-yr amortizations.
🤦🏻♂️🤦♀️
Im 56. My mortgage was paid off when i was 45. We always paid bi weekly so that 2 times a year we had 3 payments in 2 of the months of the year. We tightened our belts, took no vacations and lived in our means. It took 19 years but now no mortgage payments ever again. We are living in a society that people have overextended themselves finacially. They are deep in credit card debt, loans and used their home as a cash register to aquire money which they will one day have to pay back with much imterest. The future does not look bright for these households unless you unload the debt you have put on yourselves. Tightening the belt and going to basics is the only way
I agree, especially with the part about “Paid the highest prices in history”. That’s the big filthy stinking elephant in the room that everyone want’s to pretend isn’t there. The banks, the real estate brokers and companies, provincial governments (transfer taxes) or anyone in the chain with a monopolistic hand on the scale…has won big. All of this at the expense of the citizen. Wait!!! the sellers made out pretty well too!! or did they? I bought a $450,000 home and all said it cost me $40,000 to move in. If I’d sold that house 3 years later for $490,000, after paying $24,500 to the listing agent for putting a sign on my lawn, I’d be taking a loss on that appreciation. Hell that’s not even counting the fees and penalties I’d pay for breaking my mortgage early. The real estate agent would have made $22,500 when he sold it to me and another $24,500 when he sold it for me for doing what? The bank makes hand over fist because the first 5 years are 70% interest payments 30% principle so they’ve pocketed all but 30% of my mortgage and the CMHC basically steals your downpayment as a “premium”….
100% agree, those poor stupid masses didn’t do their homework because if we had we definitely would have been able to do things different…(sarcasm). Now we get smoked with higher rates, the agents still get their free money because they OWN the market and the banks never lose.
Government trying to get back covid relief money paid and cost back at expense of hard working Canadians. More refereges in county damnd goes up from that also stains our health care systems and and more demand for housing of course and price rise due to demand as with every thing.think this is sick.that people born and raised here now have to pay the price and many people will be loosing homes they workrd hard to get and governments getting rich . Then send money to other countries when here in Canada working poor fight every day to survive stop out of county investing in residential properties from driving up prices let the investor pay higher cost and leave Canadians with homes where is common sense any more.i know there is a lot more at work here but this is just government cash grabs and banks get richer there are put us into recession and breaking hard work people
Get a clue Laura
Yes, one or two more rate hikes and should certainly be able to destroy most of the rest of peoples lives. Especially those that had just bought their first house at the peak of the market.
Good job BOC! Especially a crisis that you and our government created. This inflation by giving free, NOT, money away with fresh counterfeit money printed out of thin air and ZERO gold to back it up because of course in your great wisdom you thought it wise to sell what little bit we had left!
Canada inflation is lower then almost every other g8 nation. Inflation is more due to a war spiking energy prices, supply issues from covid, and lockdowns in China.
BOC in 2020: Low interest rates stay at least until 2023. Here we are in 2022, rates are 3 ples. Why aren’t they being responsible of their false information while many people has to suffer from it?
Bear in mind though, that MANY holding variable rate mortgages SWITCHED over to a fixed one during the summer as rates started to climb… Most knew that the BoC would raise rates well into the fall and maybe winter. I would be curious to know how many mortgages are fixed vs variable these days… my guess is not many are variable and if they are, probably the amount is not very high either!
As usual, I blame the consumer. Just can’t stop buying stuff they don’t need.
We all know what caused this. Bank of Canada spent nearly 1B dollars in June 2022 in the U.S. Stock Market. They invested and bought NIO at 31.50 per share and MULN for 1.02 per share.
Currently NIO 10.00 per share and MULN 0.20 per share.
THIS IS WHY. WE ARE PAYING THE PRICE.
I have 156,000 shares of MULN and I paid way less then Bank of Canada. Also 40,000 shares of GSAT. GSAT is the solution of the world for EV Recalls using over the air technology through qualcomm digital chassis. CRISTIANO CEO of qualcomm said during qualcomm investor day in Sept 2022 “we will reveal more partners in the upcoming months”, he’s about to open his mouth and all major brands in North America and China will benefit from 1/3 of all EV recalls worldwide will be fixed automatically with over the air updates.
Cash is king. Get good at the stock market. We are soon entering a bull market with the U.S. Stock Market.
BOC throughout 2021 & 2022 (since April 2021):
Interest rates will rise in 2022H2 (updated to 2022Q2).
https://www.bankofcanada.ca/2021/04/fad-press-release-2021-04-21/
2021/2022 RE buyers:
Let’s continue to stupidly bid up prices throughout 2021-22 and foolishly took out VRM even with full years notice.