Real Estate

New mortgage stress test could make homes less affordable

By Mia Clarke, Associate Editor

The government’s attempt to cool the hot housing market may actually prevent some people from being able to buy a new home, Toronto real estate lawyer Matthias Duensing writes in The Lawyer’s Daily.

In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced new mortgage lending rules — including changes to the affordability stress test — that took effect on Jan. 1, says Duensing, principal of Duensing Law.

“Previously, financial institutions were able to exempt purchasers with a down payment of at least 20 per cent of the purchase price of their new home from needing mortgage insurance and from being subject to the affordability stress test,” he writes.

Now, no matter how much money is put down, financial institutions have to evaluate applicants using the new stress test, which “requires federally regulated lending institutions to determine the maximum allowable mortgage loan available to a purchaser on the basis of the greater of the five-year benchmark rate published by the Bank of Canada, or two percentage points above the purchaser’s contracted mortgage rate,” explains Duensing.

He says the government wants to avoid a future crash of the housing market by ensuring that purchasers can actually afford to buy their homes — even if interest rates go up.

“However, these changes radically affect the affordability of homes to purchasers, with the result of buying power decreasing by an estimate of anywhere from five per cent to over 20 per cent in the already-limited Greater Toronto Area and Greater Vancouver Area housing markets,” writes Duensing.

“At a time when governments are desperately employing a variety of measures to bring down the runaway costs and severely limited availability of both the purchase and rental housing markets, it is possible that the combination of several provincial and federal measures designed to cool down the housing markets have worked, including the new stricter mortgage requirements.”

According to a February 2018 report from the Toronto Real Estate Board, housing prices in Toronto dropped by 12.4 per cent and home sales dropped by nearly 35 per cent after the measures were implemented, he says.

“However, that is cold comfort to the first-time homebuyer or middle-class family seeking to upgrade as their family expands, while still staying in the Greater Toronto Area,” says Duensing.

Those who don’t qualify under the stress test may be forced to stay with their "current lending institution as mortgage renewals, or staying with the same financial institution, are exempted from requiring the stress test,” he says.

But that means they would also be forced to accept their lender's higher interest rates.

“Purchasers may need to increase their down payment amount to increase their borrowing power, seek a guarantor or co-signor to the loan in order to qualify, or downgrade their dreams to small, non-detached housing options, though the increase in demand for those home options may drive condo prices even higher,” says Duensing.

“More worrisome is that borrowers may be motivated to engage other types of lenders, such as credit unions or private lenders that are not federally regulated, who may be able to continue to offer mortgages without requiring the stress test.”

The OSFI also requires financial institutions “to stick to loan-to-value (LTV) measurements that ‘are reflective’ and ‘responsive’ to risk, and are restricting financial institutions from making arrangements with other lending institutions in such a manner as to circumvent the federally regulated institutions’ LTV ratio,” he says.

“In the meantime,” writes Duensing, “the average potential homebuyer is being forced to wait for the government’s plans to cool down the housing market to bring home prices down to a point where they can qualify to purchase the home under the new stress test rules, while hoping that rising interest rates do not disqualify them in the future. When and whether that breaking point will ever come remains to be seen.”

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