A tug of war: Affordability vs Protecting Banks
The following is an excerpt from the VERICO Economic Report written by Michael Campbell
In the tug of war between affordability and protecting the banks, as the new stress test rules remind us, the government has come down clearly on the side of the banks. Remember the good old days when only insured mortgages were subject to the stress test – as you know, now it’s everybody.
Effective January 1st, 2018, everyone will be subject to the new rule that dictates that anyone applying for a mortgage, even those that require an uninsured (80% LTV or less) mortgage, must qualify under one of the following rules, whichever is higher: (1) as if the rate was 2% higher than the “contract rate” or (2) using the Bank of Canada “Benchmark Rate”. That is unless they are borrowing from a credit union. In a twist that has not been explained, Credit Union mortgage applicants are not subject to the new stress test rules.
The banks are going to be especially happy with the provision that dictates that those people who are renewing their mortgage will not be subject to the stress test as long as they stay with their current lending institution. However, if they want to transfer their mortgage at renewal to a different lender (i.e. they found a better rate elsewhere), excluding a Credit Union, they will now be subject to the new stress rules, no matter what their LTV is. Banks will no longer need to match rates with other institutions for existing customers.
The percentage of buyers who are going to be priced out of the market by the new eligibility rules remains to be seen but the consensus seems to be in the neighbourhood of 15 to 20% but not all markets will be impacted equally. Given there is no change for people putting down less than 20%, high priced markets like Vancouver and other major urban centres may not be as effected as some smaller markets.
The bottom line is that many people who, up until now didn’t need insurance, will now only qualify for a smaller mortgage thereby limiting their buying choices. Of course, they could always move to Windsor or Moncton, which Century 21 Real Estate says have Canada’s least expensive homes – 90% lower than Vancouver based on price per sq/ft.
The immediate impact of the news rules will be that many people will be scrambling to get approved before the new stress test comes into affect on January, 1st.