The Mortgage Goalposts Keep Moving

Last week the Office of the Superintendent of Financial Institutions (OSFI) decided that the stress test that had been proposed for June 1st, which was only to impact those with a down payment of 20% or greater, should be extended to all of those applying for mortgages. So now those who are putting less than 20% down payment will also be affected by the increase to the stress test.

In the past, home-buyers were given a stress test at a rate of 4.79% to make sure that when interest rates increased, the borrower would still be able to cover the mortgage at an interest rate of 4.79%. Last week’s announcement has increased that rate to 5.25%.

Let’s break down those numbers a little. Right now a buyer can get a 5-year fixed rate for 1.79%. So for example, let’s say that a buyer was looking at an $800,000 purchase with an $80,000 down payment. With an interest rate of 1.79%, their monthly mortgage payment would be $3,068.65. Under the current stress test guidelines of 4.79%, the monthly mortgage payment would be $4,229.06. As of June 1, the monthly mortgage payment would be $4,423.62 using the 5.25% rate. The lenders that fall under OSFI are trying to make sure that you can still cover your mortgage payments should rates increase to 5.25%.

But why are they doing this is my question.

The mortgage delinquency rate in Canada is less than 2%. Just over 40% of Canadians don’t even have a mortgage anymore because they have paid it off. Canadians are diligent about paying mortgage debt.

They are trying to fix a problem that doesn’t exist, meanwhile making it that much harder for a buyer to get into the housing market. They are trying to account for the possibility that your housing costs will increase by 44%. But here is the thing; right now you can get a 5-year fixed rate at 1.79% which ensures that you will be able to make your payments for the next 5 years. It doesn’t take into consideration that in the next 5 years, you might change jobs, get a promotion, make more money or any other life circumstance that might change.

How do buyers get around this new increased stress test?

  1. They must make a purchase and have an accepted Agreement of Purchase and Sale by end of business on May 31st 2021. It’s the IKEA “start the car” moment for buyers. Get out and buy something now.
  2. Meet with a mortgage broker to discuss other lending options outside of those regulated by OSFI, like credit unions for example.
  3. Line up their parents as co-signers for their purchase.

Owning real estate has been proven as a great method for wealth-building. Making the stress test harder removes real estate as a wealth building option for so many people. Why increase the divide between the rich and the poor even further? Why make it harder for the little guy to get ahead? Interest rates are at an all-time low, which represents a great opportunity for buyers. So why not allow them to take advantage of it?

This new rule will keep a lot of landlords happy as their tenants will never be able to buy a home of their own and move out. While this is great for landlords, is this what we want as a society?

I understand that housing prices across our country have climbed to new heights, which is where this concern is coming from. However, now might be the time to make some drastic decisions to increase the supply of housing in the market. The more properties for sale, the more likely prices won’t scale to these new heights. Why not create a temporary tax holiday on the land transfer tax (LTT)? In Toronto, buyers must pay a double land transfer tax which has fueled the renovation industry as homeowners decide to stay in their home and renovate, instead of moving because the transaction costs are too high.

So, for a Toronto homeowner who lives in a $1.2 million home, if they are to upgrade to a $2 million home, they would have to pay $72,950 in double land transfer tax. That’s a huge disincentive to move. Most people would just renovate or stay in their homes, which is what most people are doing. This further impacts the supply of houses on the market.

We have buyers caught in a game of musical chairs with more and more chairs being taken away so they are left to bid up the price of the few chairs (or houses) left which drives up the price every year.

If our governments are truly serious about quelling the large increases in housing prices, they will need to fix the supply issues or learn the basics of economic supply and demand theory and how it affects prices.