In an attempt to roll back some of the market-dampening heavy handedness of its mortgage stress test, the Canadian government recently announced changes to the legislation that will take effect on April 6. Rather than basing mortgage qualifications on the Bank of Canada’s benchmark rate, which depends on the posted rates of the country’s Big Five banks, and adding a theoretical two percent increase, the process will now take into consideration the median five-year fixed-rate for insured business and the actual rates homebuyers are approved for before adding the extra two percent.
The math has grown more complicated, but the projected results are simple enough to understand: There will be little impact on buying power, and what improvements develop will likely be offset by increased prices.
To put the change in perspective, the current five-year benchmark qualifying rate is 5.19 percent. According to Dalia Barsoum of Streetwise Mortgages, an updated stress test would bring that figure down to 4.89 percent.
“When I run the numbers, the impact is around a three percent increase in buying power,” Barsoum says. “It’s nothing major that’s going to change someone from not qualifying to qualifying.”
But due to supply constraints in markets ranging from Charlottetown to Victoria, even a slight increase in consumers’ ability to get into the market could impact housing prices.
“This may push demand, and if the supply side of the equation doesn’t change, that will add further pressure to prices,” says Barsoum. “It could potentially wash out the benefits the government’s trying to achieve by changing the rules because the supply side of the picture really isn’t changing.”
Another fly is buzzing around the ointment. Because the revised stress test takes into account the lending activity of banks, those parameters will inevitably change. If the median five-year fixed-rate for insured business increases, it’s possible that borrowers could wind up paying more for mortgages than they do today.
“It just happens that right now we’re at 4.89,” explains Barsoum. “But that number changes all the time. At this point in time, it is lower than the Bank of Canada rate, and it’s going to help. But because it’s a moving target, that may change.”
Further changes to Canada’s lending guidelines are likely to materialize, but Barsoum says there is a much better strategy for getting into the market than waiting for further government action: purchasing a property with an income-generating component.
“That’s a quicker solution in my view than waiting for the stress test to change or chasing small changes in the stress test,” she says.
“If someone starts to shift their focus to looking for such properties, that’s actually going to give their file a push because they have more income to work with, versus keeping their income the same and trying to qualify under slightly easier rules. The impact is much bigger.”
