Tag Archives: homeownership

What Higher Rates mean for the Mortgage Stress Test

By Sean Cooper, for Loans Canada

Special to the Financial Independence Hub

With higher rates arriving sooner than expected, Canadian’s finances are certainly being stress tested. In this article we’ll look at the history of the mortgage stress test and how higher rates are impacted it.

History of the Mortgage Stress Test

The mortgage stress test was introduced by the federal government several years back to stop homebuyers from overextending themselves. Previously, Canadians homebuyers only had to qualify based on the mortgage rate at the time of application. This was problematic for a couple of reasons.

First of all, mortgage rates could be higher when your mortgage came up for renewal. This could mean that you could face a much higher payment at renewal if mortgage rates were a lot higher then.

Most Canadians choose a five-year mortgage term. However, for those who chose a shorter mortgage term, that means the payment shock can be that much more if your mortgage comes up for renewal sooner.

The second reason it was a problem is that if someone chooses a variable rate mortgage, there’s really no limit to how high mortgage rates can go. You’re only asked to prove that you can qualify at the date that you applied. You’re not being asked to qualify again later on if and when rates rise.

What is the Mortgage Stress Test?

To avoid a similar meltdown as Americans experienced in the real estate market, the mortgage stress test came to be.

With the mortgage stress test, the borrower must prove that they can qualify at the greater of the stress test rate or your mortgage rate at application time plus 2%. The idea was to better protect homebuyers, but this came at a cost. Homebuyers saw their home purchasing power drop by 15% to 20% overnight. This is a direct result of having to qualify at a much higher rate.

Where we are Today

We’re in an interesting situation today. The mortgage stress test is still here. We’re seeing it put to good use, as interest rates are increasing faster than expected. Continue Reading…

Bank of Canada ends 2019 with a Rate Hold. What does this Mean for borrowers in 2020?

Bank of Canada

By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The final rate announcement from Canada’s central bank has come and gone: and it appears that the cost of mortgages and other forms of variable-rate borrowing are to remain stable well into next year.

The Bank of Canada (BoC) opted to leave its trend-setting Overnight Lending Rate (which consumer lenders use to set the pricing of their variable mortgages and lines of credit) at 1.75% on December 4th.  The rate has held status quo since October 2018, and makes the BoC somewhat of an outlier when it comes to monetary policy; many central banks around the world, including the U.S. Federal Reserve, cut interest rates this year to counter growing U.S.-China trade tensions, as well as the growing threat of recession.

A positive take on the Canadian economy

However, the BoC has maintained all year that while global economic instability remains a key risk, it feels confident enough in both the international and domestic economies to avoid adding stimulus. Of course, tweaking interest rates is a key tool the BoC has at its disposal in times of economic need; by keeping the cost of borrowing lower, it encourages continued consumer spending and helps avoid a credit crunch.

While a number of economists and analysts anticipated at least one downward rate cut in 2019, that never materialized. In its December announcement, the central bank stated, “There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years.” It also adds that while the risk remains, a potential recession has become less likely, and that there is reason for optimism as Canada’s economy is stabilizing.

The December report outlines that end-of-year growth has progressed largely in line with what was forecasted in October, with consumer spending rising 1.3%, as well as upticks in business investment and wage growth. As well, the BoC’s most important metric, core inflation, stayed near its 2% target, and is expected to remain in that range over the next two years. As long as that remains the case, it’s unlikely the BoC will be prompted to cut or hike rates in the near future.

Lower rates to spur Housing demand in the New Year

With little chance of rate movement in the short term, what does that spell for Canada’s housing market? In what is somewhat of a self-fulfilling prophecy, the BoC included strengthening real estate activity as one of the main contributors to economic growth, further supporting its platform to keep rates at their current historical lows. Lenders have been able to keep their variable-rate offerings deeply discounted, while fixed mortgage rates have been kept down by especially low yields in the bond market.

That’s led to a boom in cheaper credit and mortgages over the course of 2019, which has fueled growing home-buyer demand; while the federal mortgage stress test did help tamp down some borrowing activity by requiring applicants to qualify for higher rates, the shock impact of the measure has largely been absorbed.

Housing Agency calls for home sales and prices to rise through 2021

That’s a trend that will continue over the next 12 to 24 months, according to several analysts. For example, Capital Economics has forecasted national house price growth will rise at least 6% in 2020 due to low mortgage rates, as well as a growing gap between housing supply and demand. Continue Reading…