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Is Canadas Mortgage Stress Test Still Relevant?

Earlier this month, the Bank of England scrapped its mortgage affordability stress test.

With mortgage rates now north of 4% and 5%, and with some speculating they’re near a peak for this rate-hike cycle, it begs the question: are changes to Canada’s stress test overdue?

The mortgage stress test requires both insured and uninsured mortgage borrowers to prove they can meet monthly mortgage payments based on a rate of 5.25% or two percentage points higher than their contract rate—whichever is higher. These days, borrowers are commonly being stress-tested at rates in excess of 6% and 7%.

The stress test was introduced to address risks the government and the regulator saw as a result of high household debt and high real estate prices, coupled with what were historically low interest rates at the time.

Fast-forward to today, and home prices are now dropping across the country from the peak reached earlier this year, while interest rates have risen dramatically as the Bank of Canada tries to curb record inflation not seen since the 1980s.

What do you think about the mortgage stress test?

Source: https://www.canadianmortgagetrends.com/2022/08/is-canadas-mortgage-stress-test-still-relevant/

Brennan Doherty·Government and Regulation·August 21, 2022

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How Will The Latest Rate Hike Impact Variable-Rate Mortgage Holders?

Variable-rate mortgages in Canada are now averaging about 4.20%, a full percentage point higher than they were a week ago.

That’s thanks to the Bank of Canada’s latest 100-bps rate hike, which was followed by an equal increase in the big banks’ prime rate, upon which variable mortgages and lines of credit are priced.

The prime rate at most lenders is now 4.70%, a level not seen since 2008, and up from 2.45% at the start of the year.

“I think the big takeaway here is what it’s going to do to the variable-rate mortgage segment,” Steve Saretsky, a Realtor at Oakwyn Realty, told BNN Bloomberg in an interview. “At the end of the day, we’ve seen a huge cohort of people—more than 60% of purchasers over the last year and a half—going [into] variable-rate mortgages.”

Saretsky added that on top of the 100-basis-point rate hike, new variable-rate borrowers will have to qualify at a stress test rate of 200 bps above their contract rate as opposed to the minimum of 5.25% (something fixed-rate borrowers have had to do ever since fixed rates rose above the 3.25% threshold). Stress test rules for both insured and uninsured mortgages mean borrowers must prove they can afford payments based on their contract rate plus 2% or 5.25%, whichever is higher.

“Now they’re getting stress-tested effectively at about 6.20%, 6.25%,” Saretsky said. “That again will reduce purchasing power and that will feed through to the housing market.”

Source: https://www.canadianmortgagetrends.com/2022/07/how-will-the-latest-rate-hike-impact-variable-rate-mortgage-holders/

Steve Huebl·Interest Rates·July 17, 2022

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