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The Department of Finance created shockwaves this week with its announcement that it will be revamping how insured mortgages are stress tested.
Now that the dust has settled, here’s a more in-depth look at the implications, as well as some industry reaction.

But first, a quick recap of what’s changing come April 6, 2020:

Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%

Based on the Big 6 banks’ posted 5-year fixed rates.

New stress test rate (if it were in effect today): ~4.89%

Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

How much does it help the average buyer?

There’s no question the new formula for stress testing insured mortgages will help many buyers who are currently just on the cusp of being able to pass the stress test.
Consider that the current stress test rate of 5.19% is a full 283 basis points higher than the lowest available insured mortgage rate on the market.

The new formula will narrow that gap by 30 basis points after April 6. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization.

Alternatively, it will allow those who can easily pass the stress test to purchase about 5% more home. As Ron Butler of Butler Mortgage Inc. told us, “Someone who qualified for a $500K mortgage (previously) will qualify for $525K in April.”

Those dreaming of homeownership face a long list of obstacles: high prices, low supply and ever-changing mortgage rules and qualification requirements, to name a few.
But that hasn’t shaken Canadians’ desire to have a place to call their own, according to the latest consumer survey from Mortgage Professionals Canada.
For those who already own a home, 90% are happy with their purchase, while those considering homeownership see positive long-term financial benefits.
An overwhelming 76% of Canadians believe they’d be financially better off as a homeowner vs. just 8% who feel they would be better off renting.
But the findings acknowledge the path to homeownership isn’t always an easy one. Out of a list of six major decisions, homebuying ranks as the second-most stressful (behind moving to another city).
“Buying a home is complicated and challenging and stressful. Yet we still buy homes. We do it because we believe that it will make us better off than if we rent,” says the report’s author, Mortgage Professionals Canada Chief Economist Will Dunning.
“In most situations, owning a home provides a positive (and tax-free) ‘rate of return’ on the owner’s investment of equity, and that rate of return rises over time.”
Paul Taylor, President and CEO of MPC, says the association has learned much about the resilience of the Canadian homebuyer through its past surveys. “We’ve learned that Canadians are generally very prudent and considerate with their financial decisions.”

 

Consumer Sentiment

  • While Canadians agree (6.52 out of 10) with the following statement, “interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners,” the level of agreement has fallen from the long-term average of 6.93.
  • They also continue to agree that “real estate in Canada is a good long-term investment” (7.16) and that mortgages are “good debt” (6.99).
  • Concerning the current economic outlook for the next 12 months, the survey found Canadians are mildly optimistic (6.07), slightly above the neutral score of 5.5.

 

The B-20 stress test

  • Only half of Canadians are aware of the stress test requirements
  • While this isn’t necessarily alarming, given that most people aren’t imminently buying a house and don’t need to be familiar with the rules, Dunning noted, “this limited awareness is also present among people who expect to buy a home during the coming year: there is a risk that some buyers could have unexpected difficulty in obtaining the financing they need.”
  • Respondents agreed (6.84 out of 10) that the stress tests will “ensure that homebuyers will still be able to afford their homes if interest rates rise by a large amount in the future.”
    However, those surveyed also agree (6.62 out of 10) that the stress tests “will result in more people having to turn to more expensive mortgage options from lenders.”

 

The First-Time Home Buyer Incentive

  • Canadians are in “moderate agreement” that the new First-Time Home Buyer Incentive (FTHBI), which launched on September 2, will “make it easier for Canadians to afford a home.”
  • However, among existing homeowners, most say they would not have used the program when they bought their first home.
  • Most respondents also said they would not be willing to give up equity in their home.
  • Dunning expects the program will result in less than 5,000 incremental first-time purchases per year.

 

30-Year Amortizations

  • The idea of raising the maximum amortization period to 30 years (which was reduced to 25 years in 2012) has a certain degree of support among Canadians.
  • Respondents agreed (6.71 out of 10) that bringing back 30-year amortizations would “allow homeowners to control their payments in the critical early stages of their mortgage.”
  • There was also a feeling that it would “result in more Canadians being worse off overall at the end of their mortgage” (6.15 out of 10) and would “result in more Canadians purchasing homes that they can’t afford”(6.72 out of 10).
  • Compared to the FTHBI, 44% favoured a return to 30-year amortizations vs. 27% who preferred the FTHBI.

 

Courtesy: Canadian Mortgage Trends

Five months ago the Liberal government unveiled the First-Time Home Buyer Incentive, a new initiative aimed at easing affordability for first-time homebuyers.

The FTHBI officially came into effect Monday and will start providing interest-free shared-equity loans to interested buyers in the form of down payment assistance.

To recap how the program works, participants must put down at least 5% of the home’s value with their own money, while the government (through the Canada Mortgage and Housing Corporation) would contribute an additional 5% of the down payment if the purchase is of an existing home, or 10% if it’s a new build.

The buyers don’t need to make any monthly payments, though the loan must be repaid after 25 years or when the home is sold.

The CMHC also shares proportionately in any future gains or losses in home value.

Of course, there are certain restrictions:

The mortgage must be default insured
It’s only available to first-time buyers with a household income under $120,000
Participants must have a minimum 5% down payment
The mortgage amount plus incentive cannot be more than four times the participants’ annual household incomes (approx. $565,000)
Critics have pointed out that, based on the above math, buyers would qualify for less home than they could otherwise purchase by not participating in the program.

“By limiting borrowers to a purchase price of four times their income, the FTHBI program caps a first-time buyer’s maximum purchase price at about 10% less than they could otherwise afford,” mortgage expert Dave Larock wrote previously on his blog. “It seems strange to me that a program that was designed to help borrowers with affordability explicitly reduces it.”

Others have noted the program is likely to be of less value for buyers in the Greater Vancouver and Toronto regions, where finding a home for under $500,000 is a challenge, if not impossible.

homeownership“We think it’s definitely going to have very regional application,” Paul Taylor, President and CEO of Mortgage Professionals Canada, said previously. “In the two most expensive cities, where we would suggest first-time homebuyers need the most support, this solution is not really going to do that.”

CMHC President and CEO Evan Siddall has responded to criticism over the effectiveness of the program in these markets by saying: “No program is going to work as well in higher-priced markets. Using 2018 data, 2,300 homebuyers would have qualified in Toronto and 1,100 in Vancouver. Around 25% of home sales in Toronto in 2018 were for homes under $500K and 17% in Vancouver.”

The CMHC expects 100,000 homebuyers to participate in the program over the next three years.

Industry experts say it will be interesting to see the actual participation rate, given that a similar program launched by the B.C. government in 2016—the Home Owner Mortgage and Equity Partnership—was cancelled due to a low participation rate.

It was expected that 42,000 B.C. homebuyers would participate over three years, though the program received just 3,000 applications.

 

Courtesy: Canadian Mortgage Trends