Chad Moore Calgary Mortgage Broker

Justin Trudeau, Western Canada’s best friend,  asked Canada’s finance minister, Bill Morneau, to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic”. 

This has people in the Mortgage industry buzzing.  And if you’re interested in Canadian Mortgage policy and how this can affect the market value of home prices, listen up …

Let’s cover off the following:

1.  Quick reminder about the stress test. 

2.  How the current stress test is panning out. 

3.  Potential changes to the stress test. 

Stress Test Reminder:

In Mortgage land, a stress test means qualifying an applicant’s ability to pay for the Mortgage payment at a higher interest rate. 

November 2016: all insured Mortgage applications (less than 20% down payment) were subject to a version of the stress test. 

January 2018:  ALL Mortgage applications, regardless of down payment percentage, were subject to a qualifying stress test. 

The stress test is the greater of the following:

• 2% above the contract interest rate (the client Mortgage rate). 

OR

• Mortgage Qualifying Rate (MRQ) which is derived from the big 5 banks in Canada – a mode of their posted interest rates. 

Many, many people have questioned how this stress test formula came to be.  To my understanding the best answer is “because“.  

Because …why?  <silence>

Many people in other parts of the country, especially me in Alberta, were “palms upping” the Government.  

Why stress test Albertan Mortgage borrowers?  Our market is anything but frothy. 

Regardless of the uproar, specifically the National Mortgage Brokers Association, version one of the stress test was rolled out Nationally.  

How Is The Stress Test Panning Out?

For the most part, the stress test is playing out in the market as designed.   

Officially, the policy has been touted to increase the quality of debt Canadians are taking on.  

Really, many agree policy makers wanted to dampen the uptake of Mortgage debt and cool frothy Real Estate markets in Canada (Toronto & Vancouver).  For the most part, along with other policy changes, the intended effect is taking place. 

Policy makers are also watching the edges of the market.  Focus is on people who have borrowed well above a recommended debt servicing limit.  

Stress testing these highly leveraged borrowers Mortgage limit shrinks home ownership default risks, should the economy take a turn for the worst.   

I think there has been enough time for the Mortgage qualifying rules to flush through the system.  I’m hearing that policy makers are relativley pleased with the results thus far. 

Potential Changes To The Stress Test:

As mentioned above …Justin Trudeau asked Canada finance minister, Bill Morneau, to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic”. 

Here’s what “more dynamic” might mean:

• Regionalizing the stress test.  With how economically diverse our country is, I could see some merit to this change.  Agreeing on the details of the regionalization might be difficult to decide on as a relaxation of the stress test in one area, might drive prices higher relative to a different region.
  
  
• Changing how the stress test is derived.  I mentioned above, the current stress test is the greater of the Mortgage Qualifying Rate, or 2% above the contract interest rate.  How that was decided on is a mystery to many?
  
  A dynamic change might be making the stress test related to bond market pricing?  This way movements of the market would affect the stress test direction. 
  
  Another idea to make the stress test more dynamic is bringing more transparency to how/why the Bank posted interest rates move.  For example, over the past year, five year fixed interest rates have fallen from about 3.59% to as low as 2.49%.  During this same period, the Bank posted rates came down from 5.34% to 5.19%.  
  
  
• Change who the stress test is applied to.  For clients coming to the end of their current Mortgage term (renewing their Mortgage) – changing Mortgage lenders requires the clients to qualify at the stress test. 
  
  I’ve seen this first hand …Mortgage lenders will offer higher than market interest rates, especially if they have data or think the clients won’t qualify at another lending institution.  I’ve also read articles that lenders are reporting an improvement in their retention ratios.  

Conclusion:

I think the Mortgage qualifying stress test is here to stay.  How the stress test is derived and who it is applied to – dynamically – might be changed?

The Federal Conservative party had one interesting Real Estate related campaign initiative: bringing back 30 year amortizations for insured (less than 20% down payment) Mortgages.  This would move the needle on peoples affordability.  I’m not sure if I see that in the cards anytime soon. 

I hope this was helpful and informative for you …

Talk soon,

Chad Moore

P.S

Christmas shopping update …Amazon Prime.  That is all.  

Merry Christmas!