What You Need to Know About the New Mortgage Stress Test for 2018

What You Need to Know About the New Mortgage Stress Test for 2018 1024 427 Guardian Financing

The new mortgage rules aimed at cracking down on the Canadian mortgage market will result in about 100,000 people to fail a stress test on their finances. Starting January 2018, every unsecured borrower from a federally regulated lender will have their finance’s stress tested to ascertain that they will meet their mortgage obligation, should rates go higher than they are today. To achieve that, lenders must test the borrower’s finances with the assumption that the rates were two points higher than what they are currently, and see if the borrower will still be in a position to pay the loan.

The Mortgage Professional Canada estimates that up to 18% of borrowers who are stress tested would not make it under the new regulations. This translates to about 100,000 buyers failing the test, hence being locked out from potentially owning a home. According to the group, the idea of the stress test, is indeed a great one, only that the parameters are set too high, and consequently, a lot of Canadians may not realize their dreams of becoming homeowners.

From most experts’ point of view, the test has ignored two fundamental things in evaluating the borrowers’ ability to meet the loan obligations. One, the stress test ignores the fact that borrowers will have paid about 15% of the principal amount as down payment and even if they make no repayments within five years of the loan, they already have equity on their property. Secondly, the test ignores the fact that people will always work hard towards increasing their incomes over time.

A better way to conduct the stress test, therefore, would be to test the borrower’s finances at a rate that is ¾ of a percentage point higher, and not a whopping 2 points. Otherwise, the test might as well impair the entire housing market, and its ripple effects will be felt throughout the whole economy.