"Stress test' to be applied to ensure home owners can truly afford home purchase at a certain level
Only time will tell about any effect on local real estate sales
By Mark Schadenberg
The
new tighter rules in mortgages – as introduced by national Finance Minister
Bill Morneau -- could also set a trend as the banks and other lending
institutions will be forced to calculate an amount a buyer may be able to carry
on a monthly mortgage payment (PIT = principle, interest and taxes) based on
the 5-year fixed rate (Currently 4.64%) and not the advertised rate of the possibility of actually obtaining a lower
variable interest rate.
The so-called ‘stress test’ of a mortgage has been
created by Ottawa, in my opinion, to assist lenders in the process of
calculating risk if interest rates were to increase and a home owner was
enjoying a minuscule variable interest rate, which would rise along with posted
interest rates. If a home owner could no longer afford the home, then what?
I always remind anyone that qualifying for a mortgage has many factors beyond being comfortable with the principle, interest and taxes (PIT) each month. Additional factors include the buyer's credit record (beacon score), total annual income, employment security, commitment to other monthly amounts (Car lease, credit cards, furniture purchases, student loans) and overall future plans such as vacations and children.
With
the high ratio mortgage market always in place as a vast majority of buyers do
not have 20% down when buying, the federal government will likely soon increase
the CMHC mortgage insurance percentages again.
Not
to get off topic from the WIDREB (Woodstock-Ingersoll district real estate board) announced sales stats, (see post from Oct. 7), but there are many --
countless actually – factors dictating the market, ranging from availability of
rental apartments for our ‘aging in place’ demographic to employment
availability, interest rates, and even gas prices play their role in affordability of
commuting long distances from affordable homes to your employment.
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
From
Dominion Lending Centres in a press release:
Measures
Affecting All Homebuyers
The Finance Department says in its press release that, "Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it." This is a "Nanny State" measure to protect people from themselves, as the Bank of Canada has long been concerned about the growing number of households with excessive debt-to-income ratios. It will make housing less attainable, at least in the short run. If it, therefore, substantially reduces housing demand, home prices could decline, ultimately improving affordability. This, of course, is not what the 70% of Canadian households that already own a home would like to see.
The Finance Department says in its press release that, "Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it." This is a "Nanny State" measure to protect people from themselves, as the Bank of Canada has long been concerned about the growing number of households with excessive debt-to-income ratios. It will make housing less attainable, at least in the short run. If it, therefore, substantially reduces housing demand, home prices could decline, ultimately improving affordability. This, of course, is not what the 70% of Canadian households that already own a home would like to see.
- Broadened
Mortgage Rate Stress Tests: To help ensure new homeowners can
afford their mortgages even when interest rates begin to rise, mortgage
insurance rules require in some cases that lenders “stress test” a
borrower’s ability to make their mortgage payments at a higher interest
rate. Currently, this requirement only applies to a subset of insured
mortgages with variable interest rates (or fixed interest rates with terms
less than five years). Effective October 17, 2016, this requirement will
apply to all insured mortgages, including fixed-rate mortgages
with terms of five years and more.
- A buyer with
less than 20% down will have to qualify at an interest rate the
greater of their contract mortgage rate or the Bank of Canada’s
conventional five-year fixed posted rate. The Bank of Canada’s posted
rate is typically higher than the contract mortgage rate most buyers
actually pay. As of September 28, 2016, the Bank of Canada posted rate was
4.64%, compared to roughly 2% or so on variable rate mortgages.
For borrowers to qualify for mortgage
insurance, their debt-servicing ratios must be no higher than the maximum
allowable levels when calculated using the greater of the contract rate and the
Bank of Canada posted rate. Lenders and mortgage insurers assess two key
debt-servicing ratios to determine if a homebuyer qualifies for an
insured mortgage:
- Gross Debt
Service (GDS) ratio—the carrying costs of the home, including the mortgage
payment and taxes and heating costs, relative to the homebuyer’s income;
- Total Debt
Service (TDS) ratio—the carrying costs of the home and all other debt
payments relative to the homebuyer’s income.
To qualify for mortgage insurance, a
homebuyer must have a GDS ratio no greater than 39% and a TDS ratio no
greater than 44%. Qualifying for a mortgage by applying the typically higher
Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios
serves as a “stress test” for homebuyers, providing new homebuyers a buffer to
be able to continue servicing their debts even in a higher interest rate
environment, or if faced with a reduction in household income.
The announced measure will apply to new
mortgage insurance applications received on October 17, 2016 or later.
Dr Sherry Cooper, chief economist with
Dominion Lending Services
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