Tag Archives: mortgage stress-test

The Mortgage Stress Test Troubles Just Got Worse

CMHC reported that the 2019 national apartment vacancy rate was down to 2.2%. Yes, because the stress test does not allow younger people without a big income to buy even an entry level condos or townhouses. Yes, it’s fine to pay triple the amount in rent – but heavens forbid they want to become home owners. Another way the Federal Government, through CMHC has absolutely messed up the free market system. But it does reward landlords with huge rent increases since their renters don’t have the option of purchasing and landlords don’t use a stress-test.

To make things worse, CMHC tightened up the rules even more to put the brakes on home sales in the middle of a no home sales market. Your total payments from credit cards to your car, to the new mortgage, taxes and utilities now can’t exceed 35% of your gross income. That’s down from 39%. So someone making $50,000 just had their ability to get a mortgage reduced by $167 a month. Plus you now need a credit score of 680 or higher – up from 600 and you can no longer borrow the minimum 5% down payment.

The person making $50,000 in our example can have 35% maximum going towards all bills. That’s $1,458 a month. That’s an easy calculation before ever even thinking about becoming a home owner. That has to include taxes (let’s just use $300 a month) and utilities (most lenders us a flat $100). Deduct that $400 from the maximum allowed leaves this person $1,058 for the actual mortgage.

Since it’s most likely to be a condo or townhouse, the condo fees have to be in that 35% maximum debt, too. You’d be hard pressed to find a condo fee under $250. OK, so condo fees, utilities and taxes off the top brings it down to $800 left. Next hurdle is that you need to qualify for a mortgage rate 2% higher than actual. So rough numbers is that you need to do the calculations on about a 5% mortgage rate even though you’ll be under 3% in your actual payment. And that’s a max of $135,000. And don’t forget that this is 35% of all debt. So this math is all assuming the person has no car payments, no student loans and zero balance on their credit card. If it’s someone with a $300 student loan, it’d be a maximum mortgage under $90,000. Or wait until the student loan is paid off in 20-years before every being able to buy a home.

Tell me what you can buy for $135,000 in the Okanagan – or anywhere else for that matter. And tell me what 20 or 30 something is paying under $800 rent for anything other than a garage.

Sure the stress test has a purpose. But that should be to slow down the one million dollar buyers with a 95% mortgage. Instead, it’s the law of unintended consequences of hitting the entry level buyers.

Mortgage Rates Are Down…Sort Of…

It seems like a lot of people got really excited when the Royal (now matched by a number of others) dropped their mortgage rate by 0.15% last Thursday.

Any time rates or prices drop, it’s great for buyers, but this one isn’t anything to get excited about. It’s a rate drop for new mortgages and not a drop in the prime rate. So if you’re on a variable rate mortgage, it’s not likely your bank will drop your payment starting next month. Even if they did, it’d amount to $5.60 on a $250,000 mortgage. If they choose to drop your line of credit rate, you’d save $1.20 a month on an average $36,000 credit line.

Any tiny drop in rates isn’t going to rescue the housing market in 80% of the country. What needs to change is the mortgage stress rules that force borrowers to qualify for sticker rates when their actual rate will be about two percent lower. That rule certainly makes sense in overpriced housing markets.

It was designed to slow down the market. But what it’s done is not only slow it down, but stop it, and then shrink it in a big way. Toronto sales down 16% last year, as well as prices – Vancouver sales down 32%. Overall, sales are down 47% and mortgage applications are now at a 22-year low. One of the big banks’ mortgage applications are down by half over a year ago.

Is THAT what the goal was? The desire to own a home hasn’t changed, but the ability has. Now there are many signs that the federal government is running scared – and should be.

The stress test might still have a purpose but should be set by postal codes so the slow housing markets don’t keep getting killed. Plus, we’re pretty much done with rate increases. Sure, there might be one or two more, but we’re much more likely to have a recession in the next year than to have another huge wave of inflation with the corresponding rising rates.

It’s an old stat, but someone buying a home spends an additional $10,000 in everything from furniture to painting, renovators to appliances. None of that happens if the housing market has grinded to a halt. And I still maintain that there are tons of younger people who would love to get into the housing market but can’t. And if they don’t buy an entry level home, the people selling those can’t move up when they can’t sell…and none of the dominos to a healthy housing markets move!

George Boelcke – Money Tools & Rules book – yourmoneybook.com

More New Mortgage Tightening Rules

Three times the Federal government has tightened up mortgage lending rules for those people with less than 20% down payment. Now they’ve made it much harder for those of us with equity of more than 20% to re-mortgage or to buy a new home as well.

I’ll join the economists, along with the Fraser Institute, who think this new stress-test has gone way too far, and will have a measurable impact on home sales, and most of us being able to qualify for a mortgage starting January 1st.

Here’s the new rule: No matter how much you earn or how much down-payment you have, you need to qualify for an arbitrary five-year posted rate. Right now you can get a 5-year rate of under 2.8% but you still need to qualify for the 4.9% sticker rate. Stupid but true. A family making $100,000 with 20% down can afford a home worth $726,000 right now. With the new rule, that same family’s purchasing power is down to a $570,000 home. That’s a $150,000 lesser mortgage or lower priced home.

Yet this is a family that has over 20% equity and certainly not someone who’s in any trouble of being foreclosed on. Still, they have to qualify on the “pretend” rate of 4.9%. That would be SEVEN rate increases, and that’s something we’ll never see!

If you’re not making $100,000 and are not totally debt free, you’re never going to qualify for any home that’s even the average price! In my case, I need to sell my home and down-size. But if I do that, I no longer qualify for a new mortgage. Talk about putting huge numbers of people into a total lose-lose catch-22!

Right now, you can still avoid this so-called B-20 rule with your credit union because they aren’t governed by federal regulations. But it appears that most of them will end up matching the rules at some point. All I can suggest starting January is to call a number of credit unions and ask. You don’t need to go in or fill out an application. Just ask if they’re also using the B-20 regulations.