Canada

Canada Is Making It Easier For People To Take Out Larger Mortgages

Canadian real estate sales are soaring, and prices are accelerating quickly. Obviously, it’s the perfect time for the government to loosen credit conditions. The Department of Finance (DoF) announced changes to the way insured mortgages will be stress tested. The new changes go live on April 6, 2020, and will lead to a more responsive benchmark rate used for testing. In plain english, this means borrowers will see the maximum mortgage amount increase.

The Current Insured Stress Test

The current “stress test” was introduced for insured mortgages just over two years ago. Starting in 2018, insured buyers (those with less than 20% down) are tested at a higher borrowing rate. All insured buyers need to be able to pay the greater of their contract rate plus 200bps, or the Bank of Canada’s benchmark rate. The benchmark rate, as anyone’s that’s shopped for a mortgage knows, was much higher than you would encounter at lenders. This is because it was based on the posted 5-year fixed rate, which is usually only used in calculating some penalties.

In December, Prime Minister Trudeau ordered the finance minister to review the test. The results came in this week, and they’re going to be making the test more “dynamic.” Starting on April 6, 2020, insured borrowers will see a brand spanking new stress test. The new test, in short, will mean borrowers will be able to take out much bigger mortgages.

What’s Changing?

The key change here is in the benchmark rate used for qualifying borrowers. As mentioned, the previous benchmark used was based on the 5-year fixed rate. The new benchmark will be “weekly median 5-year fixed insurance mortgage rate from mortgage insurance applications, plus 2%.” They mean plus two points, not percent – but why would Canada’s DoF know the difference?

Anyway, the point is they’ll be using median rate people are actually paying. That’s an important difference, and in most cases means the stress test rate will be lowered. This only applies to insured mortgages as of now, but that might change soon. OSFI is accepting public feedback until March 17, 2020 to apply similar rules for uninsured mortgages.

The Impact On Canadian Real Estate

The changes mean people are going to be able to carry larger maximum loans. DoF estimates, as of February 18, the changes would see the benchmark drop by 30 bps. The decline works out to a ~3% increase in purchasing power. Not an earth shattering amount, but it’s almost the size of the first-time home buyer incentive (FTHBI).

Even though it doesn’t seem like much, it’s likely to have a material impact. The FTHBI  has only delivered $53 million of assistance across the country. However, it did send a shiver of FOMO through buyers. The incentive lifted expectations of more buyer competition. That helped many millennials fearful of being locked out of the market accelerate their purchase. Speculators, looking to capitalize on this new found credit young people will have, also went on a shopping spree. Why leave someone else’s credit on the table, right?

The way the stress test was initially set up was arbitrary, and unrealistic. It didn’t respond to real world conditions, and tested people at unusually high rates. It should have been designed with the new measures in the first place. However, the update at this very moment, just a few months after the FTHBI, is going to be problematic. The Government is inflating the maximum purchase price again, right after launching a demand inducement scheme. This comes at the same time sales are soaring across the country, and price growth is nearly at levels before the stress test.

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18 Comments

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  • Ethan Wu 4 months ago

    Important impact on marginal buyer. This is going to inflate condo prices like nobody’s business, especially in Quebec. In scarce inventory environments, people will price in all of the credit incentives the marginal buyer will use.

    It doesn’t matter if you use these programs. The seller is pricing it for the person that will max their credit, then use the shared equity program, plus a rate increase.

    • Ian 4 months ago

      Sorry if this is dumb, but can you elaborate on “marginal buyer” and how it inflates condo prices?

      • Ethan Wu 4 months ago

        Marginal buyer = person that actually buys. Ignore the income of lookie loos, and people that are losing bidding wars. They set the market price in an up-market. They disregard risk, and fundamentals (for reasons like they’re dumb or so rich it doesn’t impact them), but it doesn’t matter. That’s now the price if you want something.

        The price may rise or fall tomorrow, but they set the price today.

        It then has an infectious approach to buying. Fundamentals don’t matter. Everyone is assuming a lot of risk.

        The best explanation I’ve seen was on this site, and it explains it in the context of money laundering and how rapid price escalation in emotional environments only requires a few players to set the tone.

        • Sean 4 months ago

          I think this is the one you’re talking about? One of my favorite articles. I send it to a lot of clients to help them understand asset price creation, and why long term diversification is important.

          https://betterdwelling.com/how-a-little-money-laundering-can-have-a-big-impact-on-real-estate-prices/

        • Mike 4 months ago

          I believe the worst possible thing a government can do is allow foreign investment in real estate in their country. I have lived in Canada, UK, New Zealand, and Australia where real estate is no longer affordable for the vast majority of the local population, which has to fund the purchase and deposits from tax paid incomes, which have remained stagnant of over 20yrs. Especially the first time home buyers. Inflated prices have destroyed the dreams of the citizens in these countries where real estate is used by foreigners to park cash into empty (investment) houses. Governments have failed to protect the interests of the people. For first time home buyers who do manage to buy their first home, they are burdened with astronomical mortgage repayments not to mention student loans. They have no disposable income left to spend on their wants because what income is left after the continual rise of taxes, this gets spent on the needs.

          Bottom line – house price inflation is the biggest Ponzi scheme created by the governments. So long as it does not collaspe under their watch – who cares!

  • GTA Landlord 4 months ago

    Yup, problems are brewing. Agents I know are telling people to hold their inventory until April/May, so they can get the most. They’re expecting Toronto condos to do what SFHs did in 2017.

  • Christopher Barclay 4 months ago

    People voted for a Liberal government that openly stated they were going to make housing more expensive. Not sure how many times people are going to swim with sharks, then wonder why sharks keep biting them.

    Good news for us homeowners though. I voted for them because I knew this was going to raise the value of my home. *up top*

  • Average Man 4 months ago

    THIS IS ONLY GOING TO END WELL! RIGHT EVERYBODY!? RIGHT!?

    • Trader Jim 4 months ago

      How can it not? We need to expand credit just 12 weeks after a new loan program, and I don’t even believe the increased allowance for Toronto and Vancouver has gone into effect.

      • Average Man 4 months ago

        TORONTO IS THE NEW NEW YORK! IMMIGRATION! GLOBAL ALPHA CITY! A BACHELOR IN HONG KONG COSTS $5000 A MONTH! NEW NORMAL! MOVE TO ST. CATHARINES AND COMMUTE! TECH HUB!? TECH HUUUUUUB!!

    • M.Bury 4 months ago

      “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

    • alvi 4 months ago

      Maybe the world will go to financial hell at some point( something that has been predicited for decades) but bond yields are not worried about credit risk at the momentbut .Gold is catching a bid, though is that a portent of something?. In the meantime people still have to live somewhere and Canada looks pretty good relative to the rest of the world

  • Mike 4 months ago

    The socialist policies are back in full force. On one hand the City Mayor’s all making a big noise about affordable housing. And on the other hand, keep inflating the housing bubble. The politicians across all parties are receiving donations from the developers who have been sitting on inventory. The government changes the rules to suit the donors and the CREA organized real estate machinery.

    People are forgetting a house is for living, instead everyone has been corrupted into thinking it is an investment and therefore it has become a tool for speculation and the rich foriegners will take every opportunity to be part of the game. Its a win win for the politicians they collect higher and higher taxes and so do the agents and that shows up in the GDP as growth when in actual fact nothing is being produced by the people. All built on sub prime loans guaranteed by guess who Tax Payers.

    The house owners also feel good and will keep voting for the Liberals until they suddenly will change the rules whereby they will slap a capital gains on primary residence also.

    Hold tight the FOMO is going to take hold for yet another 4yrs.

  • rr 4 months ago

    I don’t understand the negative part. This is just an opportunity for someone who has been saving/working 9-5 regular accounting job for 4 years to afford a little condominium in Toronto. Please people let’s be rational.

  • LoL 3 months ago

    The problem is if everyone becomes mortgage poor or rent poor,with no disposable income left. what happens to the rest of the economy ,nothing else is being bought to drive the real economy. Just look at the stores closing, cars aren’t selling. How long before layoffs start coming. You can’t expect to run an economy from one source, it won’t work

    • alvi 3 months ago

      Well if Canada goes to hell along with the rest of the world then housing affordability will be not an issue so government should not waste its time providing “affordable housing “. Besides people who live in San Francisco and New York can always move to Detroit where there is alot of “affordable housing” the same goes with GTAA residents, the North West terriorities beckons

      Do you ever wonder why the governmenst pay lip service to providing affordable housing, fixing our education and health care and education system, “issues” that have been around since the 1970?

  • spespe 3 months ago

    I’ve been to a ton of pre-con closing events and went inside to PDI/new condo closings in downtown Toronto… A lot of the buyers are local people actually, bought early for their kids’ future, or new grads back in the days buying to live for themselves.

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