High mortgage stress test rates won’t be with us forever

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Condo Towers dot the Toronto skyline on January 28, 2021. Data from the Canadian Real Estate Association showed a 22-percent drop in Greater Toronto home values ​​in just five months.Frank Gunn/The Canadian Press

Welcome to the Mortgage Rundown, a quick take on the Canadian home financing landscape from mortgage strategist Robert McAllister,


There has been an uproar in real estate circles about the mortgage stress test hurting the housing market.

Earlier this month, the Toronto Regional Real Estate Board (TRREB) questioned Whether the current mortgage stress test “remains in force.” This comes after data from the Real Estate Association of Canada showed average Greater Toronto home values ​​dropped by 22 percent in just five months.

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TREBB propounded, “Is it appropriate to test home buyers two percentage points above current higher rates, or should a more flexible test that follows interest rate cycles be implemented?”

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Our banking regulator, which designed the mortgage stress test, responded recently. Peter Routledge, head of the Office of the Superintendent of Financial Institutions, said in a speech On September 8: “I assure those of you who oppose loosening of underwriting standards that OSFI will not do this.”

OSFI will likely argue that the stress test is doing exactly what it was designed to do, ensuring that new mortgages can withstand higher rates and economic uncertainty as borrowing costs rise.

If, for example, OSFI only requires borrowers to prove that they can increase rates by one percentage point — instead of the current two percentage points — homeowners will be able to qualify for a larger mortgage, Which will also give them less financial breathing space. This can lead to higher mortgage defaults if rates and inflation exceed all expectations.

OSFI argues that this will increase the risk in the banking system. However, some would argue that the risk is insignificant in cases where borrowers are locked into a mortgage for the full five years. Eventually, they’ll pay off their mortgage significantly in that time, on top of salary increases and — in more specialized markets — price appreciation.

In fact, if stress testing were to be reduced someday, regulators may be more likely to do so on fixed terms of five years or longer.

pro cyclic

OSFI says it is continuously evaluating its mortgage underwriting policies to monitor for “risks of pro-cyclicity.”

According to OSFI spokeswoman Elizabeth Roach, pro-cyclicity occurs when a policy measure exacerbates natural fluctuations in the financial system. OSFI is concerned about policy measures that could exacerbate a bearish or tense market scenario.

Technically, any stress test that makes it difficult to qualify for a mortgage, thus removing demand amid sell-offs, is cyclical. It is a question of how much more house prices fall because of this. The more prices fall, the less equity there is to protect financial institutions from defaults by borrowers.

At present, the regulator is not ready to do anything in this regard. So, for those who want an easy mortgage stress test, you’ll have to use a non-federally regulated lender—or wait.

Waiting for what?

Today’s lowest possible stress test rate is 6.69 percent if you get an insured mortgage at a federally regulated lender. That equates to 4.69 percent — the lowest rate available nationally — plus two percentage points, OSFI’s stress test buffer.

But once the Bank of Canada’s rate hikes end, more investors will start buying bonds. This will lower bond yields (bond prices move inversely and yields move inversely), which usually lowers fixed mortgage rates.

Shortly afterwards, when the Bank of Canada began easing monetary policy again, it would reduce mortgage rates even further.

So we just have to wait.

“We still expect a sharp decline in inflation to eventually persuade officials to start cutting rates in the second half of next year,” Andrew Hunter, senior US economist at Capital Economics, said in a report on Wednesday. “

The Bank of Canada is cutting rates until December 2023 in the bond market. This may be wishful thinking. The point is that Canada’s economy cannot withstand high rates for long. Consumers are simply too leveraged. They are three times more sensitive to inflation than they were last time – in the late 1970s and early 80s.

But rest assured, the high stress test rates won’t be with us forever. But they’ll be with us long enough to drive home prices up a bit more, and that’s expected to be in a down cycle.

For those with liquidity, a long-term investment horizon and a penchant for real estate, embracing the future real estate opportunity that this bear market creates.

Mortgage rates remain the same

Financial costs have declined over the past few weeks. Lenders are now waiting and watching the reaction of the bond market to next Tuesday’s potentially blockbuster Canadian inflation report and next Wednesday’s US rate announcement.

As this goes to press, we are down about a quarter point in five-year bond yields from 14-year highs. Yield is generally a leading indicator of fixed-rate mortgage pricing, so a hot inflation report from Statistics Canada or a hawkish US Federal Reserve next week could easily drive fixed rates higher.

The conversation doesn’t necessarily have to be true.

Our Big Six banks, which control much of Canada’s mortgage market, are biased towards keeping rates high. Indeed, at least one major bank is raising rates again this week. Between unrelenting inflation, falling home prices, high loan-loss provisions, an impending recession, high rates for guaranteed investment certificates, and high credit risk, the cost of funds can fall more than usual as a result of low fixed rates at large banks.

The message is don’t expect much better rates in the near term. And if you’re shopping for a home, get that pre-approval Liketi-Split.

Lowest Nationally Available Mortgage Rates

Conditionuninsuredthe providerInsurancethe provider
1 year fixed4.69%Alternative4.44%Quest Mortgage
2 years fixed4.69%Alternative4.49%Quest Mortgage
3 years fixed4.79%Alternative4.34%some
4 years fixed4.79%Alternative4.49%some
5 years fixed4.84%Alternative4.34%some
10 years fixed5.64%hsbc5.43%Canvas Financial
5 year old hybrid5.04%hsbc5.11%Scotia eHome

until 14 september

The rates shown in the attached table are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those who make purchases with a down payment of less than 20 percent, or who convert a pre-existing insured mortgage to a new lender. Insured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. The highest rates are shown for providers whose rates vary by province.

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Rebecca Oakes, vice president of advanced analytics at Equifax Canada, says rising credit card crime, fewer people paying off their full balances, revolving debt usage and rising unemployment are all precursors to mortgage defaults. She predicts there will be a significant increase in defaults by next year, but nothing like the early 1980s when more than one in 100 borrowers were in mortgage arrears for 90 days or more.

Robert McAllister is an interest rate analyst, mortgage strategist and editor MortgageLogic.news, you can follow him on twitter @RobMcLister,

Source: www.theglobeandmail.com

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