Mortgage Stress Test Canada

New Canadian Mortgage Stress Test Rules Introduced To Cool Overheated Housing Market

The housing market has experienced an unprecedented and unexpected boom amid the COVID-19 pandemic. There have been countless stories of how first-time home buyers and young hopefuls are being priced out of the market, and even many industry professionals from Canada's big banks have recognized the unusual overheating. Over the last few months, there have been calls for the Canadian federal government and the Bank Of Canada to intervene and implement measures to effectively cool the market.

As of June 1 st 2021, the new Canadian mortgage stress test rules took effect. This means that the minimum qualifying rate for a mortgage has changed from the previous 4.79% to 5.25%. This new qualifying interest rate has reduced the purchasing power of most borrowers by 3 to 5%. It essentially reduces the amount people will be able to spend as a maximum on their mortgage.

But does the new mortgage stress test solve the problem of Canada's increasingly unsustainable housing market? And will the stress test rate help to calm the market enough that.

How The Stress Test Impacts Mortgage Payments

Let's take a closer look at how the new stress test works and who it impacts. If you want to see how it impacts you directly, try our comprehensive mortgage calculator.

The new Canada mortgage stress test will affect Canadian home buys who are applying for a new mortgage or renewing an existing one. Stress testing at these new interest rates will sooner impact those with a variable rate mortgage, as opposed to those with a fixed-rate mortgage.

The Canada qualifying rate for uninsured mortgages, where the down payment is 20% or more, is now either two percentage points above the contracted rate, or 5.25%, whichever is higher. As of right now, this does not apply to insured mortgages.

As an example, effective June 1st, a family with an annual income of $150,000, with property taxes of $4500, will see their maximum amount for an amortization period of 25 years fall from $772,000 to $738,000.

The fact of the matter is that these new mortgage rules and stress tests alone will not do much to reduce housing costs in Canada.

Majority Of Home Buyers Are No Match For These Bidding Wars

One of the biggest issues that plague the market conditions today is the lack of transparency in the offer process. Many hopeful buyers have lost out on their dream homes in blind bidding wars, while others have taken on a substantial and risky amount of debt payments in order to get into the market.

The supply side of real estate is definitely another issue, but cannot be solved as quickly as the implementation of regulations surrounding offers. By putting these types of rules in place, housing would increase at a more gradual pace as opposed to this rapid growth we have experienced over the last year.

When potential home buyers are looking to make an offer on a home, a real estate agent will often tell them to put their maximum willingness forward. Conditions and clauses would previously protect the buyer, such as a home inspection or a few days to explore their mortgage options. Now, those standards have completely gone out the window.

Many people are finding it increasingly difficult to compete when sellers are entertaining multiple cash offers with no conditions. Offers of this nature are subject to a fair amount of risk and other debt payments down the line - but it is slowly becoming the new standard of the market.

Did you know that when mortgage lenders, whether that's financial institutions or private lenders, lend on the appraised value or the sale price of a home, whichever is lower? So essentially, if a buyer makes an offer well over asking, and the value is not supported, they will have to make up the difference of the purchase price in CASH.

And while there is the potential of borrowing enough money from unsecured sources, such as credit unions, any type of unsecured home loan can throw your entire scenario offside and put you into dangerous financial strain.

Transparency Needs To Be Implemented In The Offer Process. The Stress Test Is Not Enough.

While the mortgage stress test will undoubtedly remove some buyers from the market, it seems like those who are greatly impacted will be first-time home buyers. Many of these individuals have spent years saving for a down payment and are eligible for the lowest mortgage rates, but they will continue to be isolated from the housing market due to the blind bidding wars. The stress test doesn't help.

Now imagine the Bank of Canada were to work with Canada's Realtor Association to change the process from blind to transparent. What would happen, first and foremost, is that the large gaps between offer amounts would shrink immediately as buyers would no longer have to wonder or blindly guess what a competing offer may contain. Instead, they can simply view a spreadsheet that is updated as offers are registered. This way, when you put your best foot forward, you can see everyone else's shoes.

A transparent process also eliminates offers that are far off from being successful. If the registered offer values are above the maximum you are willing to spend, you will save yourself from the mental angst of waiting to see if your home dreams can come true.
Becoming a homeowner is arguably one of the top milestones in one's life. Throughout this latest housing boom, many people are so tired of losing out on the offer process that they one day wake up and say "screw it, out all the chips in".

Here is a multiple offer scenario of three offers: The home was a detached property in North Burlington. Offer 1 was $5000 below asking, Offer 2 was at full price. Offer 3 was $80 000 over the asking price. While Offer 3 will never know what #1 and #2 looked like, they overpaid. To the tune of $79 000 or about an additional monthly payment of $300 for 25 years. Multiply that by the number of multiple offer scenarios and you'll begin to see the problem.

Is Canadian House Pricing Putting A Strain On Our Quality of Living?

It has recently been argued that the unsustainable growth in hosting prices could directly impact our quality of life. Household income has not increased at the rate of housing, and in order to afford a monthly mortgage payment, many are allocating the majority of their monthly income towards homeownership. This doesn't leave much room in the monthly budget for student loans, car payments or any other type of unexpected expense.

Panic Buying And Speculation Are Fueling The Housing Market - Not The Mortgage Rates

Prior to the June 1st enactment of the new rules, the mortgage industry saw a huge amount of panic buying. As a mortgage broker wanting to help mortgage applicants get secure the best interest rates, I am also aware of how interest rates are only one part of the equation.

Changing the qualifying rate of mortgages will only reduce these winds from 1000km/h to 950km/h. We shouldn't be making it more difficult to secure a mortgage loan or maintain the current mortgage with a financial institution - instead, it is time for our Government to work with Canada's Realtor Associations to fix the offer process.

In scenarios where supply and demand were closer to equal, an intervention was not needed. It is past time we explore a solution that doesn't make a mortgage impossible to maintain.

Circle Mortgage Is Here To Help

If you are a first-time home buyer and looking for a competitive mortgage rate, contact Circle Mortgage Group today. Our team would be more than happy to help you explore your options.

Toronto index stopped trending down in January

In January the Teranet–National Bank National Composite House Price IndexTM rose 0.3% from the previous month, a tic higher than the historical average for January and a second consecutive monthly increase. However, only four of the 11 metropolitan markets surveyed showed gains – the first time since January 2016 that a rise in the Composite Index has had so little breadth. It was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. All the other component indexes were down on the month: Hamilton (−0.2%), Ottawa-Gatineau ( 0.2%), Edmonton (−0.3%), Calgary (−0.3%), Halifax (-1.0%), Winnipeg (−1.1%) and Quebec City (−2.0%). For Montreal, it was a 13th monthly increase, and for Hamilton it was a fifth decrease in a row. The rise of the Toronto index was the first in six months. The raw (unsmoothed) Toronto index [1] on which it is based was up for a third consecutive month. The firming of the smoothed index is due entirely to condo dwellings. The smoothed index for non-condo units fell in January for a sixth straight month, bringing its cumulative decline to 9.6%.
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2018 CMHC Prospective Home Buyers Survey

In October 2017, CMHC surveyed 2,507 prospective home buyers on-line. Respondents were all prime household decision-makers who intend to purchase a new home within the next two years, including approximately 1,500 First-Time Buyers, 500 current owners, and 500 previous owners.
The survey results highlight that:
• First-Time Buyers and Previous Owners share the same top motivator to purchase a home: they want to stop renting. Improved accessibility (physical obstacles and barriers) and investment opportunity were also noted as top motivators across all groups. Changes to mortgage regulations and concerns about possible future interest rate increases were not among the top motivators.
• Over four-in-ten First-Time Buyers and Previous Owners say they would delay their home purchase if they were not able to find their ideal home, with a fairly similar proportion saying they would be willing to compromise on the size of the home and location.
• The majority of future home buyers intend to obtain a mortgage to finance their home purchase, with First-Time Buyers showing higher incidence compared to Previous Owners and Current Owners.
• Across all future home buyers groups, more than six-in-ten say they are likely to have a financial buffer in case their expenses change in the future. Furthermore, the majority of future home buyers, especially Current Owners, agree that they feel confident they have the necessary tools and information to manage their mortgage and debt load.
• Among all groups, the two most common actions completed one to two years prior to the purchase of a home were saving for a down payment and determining what type of home to buy. On the other hand, in the last three months before purchasing, about two-in ten of prospective buyers pre-qualify for a mortgage.
• About one-in-four prospective home buyers stated that they would be very likely to consider delaying their purchase in the event of an increase in interest rates.

Vancouver the main driver of the Composite in December

Vancouver the main driver of the Composite in December says Teranet and National Bank of Canada
Without Vancouver, the Composite index would have declined for a fourth month in a row. The strength of Vancouver’s index is consistent with continued tight home resale market conditions. Toronto’s index declined for a fifth consecutive month, but the unsmoothed index (see note on methodology on next page) rose for a second month in a row (middle chart). Unless the unsmoothed index relapses in January, the sequence of declines in the smoothed index should then be interrupted. However this improvement is likely to prove temporary, as it might have resulted from buyers rushing to avoid the new bylaws on qualification for an uninsured mortgage (implemented in January 2018). This view is supported by the increase in Toronto home sales in November and December compared to previous months (bottom chart). Therefore, a resumption of the downward price trend early this year cannot be excluded.
Please click on the link below to access the full report:
201712 TNB monthly commentary

Bank of Canada increases overnight rate target to 1 1/4 per cent

The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.

Fourth Quarter Housing Market Trends Seal 2017 as ‘the Year of the Condo’

According to the Royal LePage House Price Survey, Canada’s residential real estate market saw strong, but slowing year-over-year price growth in the fourth quarter of 2017. While year-over-year aggregate appreciation remained high in the Greater Toronto Area (GTA) and Greater Vancouver, two-storey and bungalow home values softened in the GTA, slightly declining on a quarter-over-quarter basis. Meanwhile, in both Greater Vancouver and the GTA, condominium prices continued to outpace all other property types, primarily due to growing affordability constraints within these markets.
The Royal LePage National House Price Composite, compiled from proprietary property data in 53 of the nation’s largest real estate markets, showed that the price of a home in Canada increased 10.8 per cent year-over-year to $626,042 in the fourth quarter of 2017. When broken out by housing type, the median price of a two-storey home rose 11.1 per cent year-over-year to $741,924, and the median price of a bungalow climbed 7.1 per cent to $522,963.
During the same period, the median price of a condominium appreciated faster than any other housing type studied, rising 14.3 per cent to $420,823 on a year-over-year basis. This trend was predominantly driven by the significant price gains witnessed in many of the country’s largest condominium markets. In the GTA, the median price of a condominium increased 19.5 per cent year-over-year to $476,421, while in the City of Toronto, the segment saw a similar gain of 19.6 per cent year-over-year to $515,578. In Greater Vancouver, condominiums also followed a similar price trajectory during the quarter, rising 20.2 per cent to $651,885, while the median price of a condominium unit in the City of Vancouver rose 18.7 per cent to $775,806. Many suburban markets across the GTA and Lower Mainland of British Columbia posted strong year-over-year condominium price gains of 20 per cent or more as well, with the segment appreciating at a faster rate than detached homes, which had previously led the charge.
“To prospective homeowners in our largest cities, condominiums represent the last bastion of affordability,” said Phil Soper, president and CEO, Royal LePage. “This is especially true for first-time buyers whose purchasing power has been reduced by tightening mortgage regulations.” Click here for more.

Time for a mortgage review

The start of a new year almost always inspires individuals to commit to resolutions that will improve the quality of life. And in the spirit of the new year, new you mantra, a mortgage review reminder is aptly timed.
Many mortgage holders underestimate the value of proactively reviewing their finances and in particular their mortgages. Yet just like annual health checkups, annual mortgage reviews are every bit as important as reviews can sometimes result in hundreds or even thousands of dollars in savings. They also are very useful when trying to determine if the mortgage plan still fits one’s circumstances.
Reviewing a mortgage allows the holder to look at several factors that include reviewing the mortgage term, the monthly payments and even the insurance coverage on the loan. The review can include looking at individual credit and the value of your home. As a mortgage broker, I can discuss the impacts on your long term finances if we create a plan that that could potentially include making increased monthly payments or contributing a lump sum.
With the new year underway and Canadians’ buying power being impacted due to new stress test rules that came into effect as of January 1, home owners and buyers need to seek the advice of a licensed mortgage professionals, such as myself. I can expedite the review process with a simple check of current rates and fees for a refinance and the terms of the current loan.
Contact me today to start the conversation and ultimately find the best mortgage for your needs.

Non-Resident ownership of condo apartments remains low and stable: CMHC

The share of condominium apartments owned by non-residents remains low in the 17 Canadian Census Metropolitan Areas (CMAs) surveyed, with the majority reporting shares of less than 1%. Non-resident ownership shares remained stable in Vancouver and Toronto, while Montreal saw an increase.
Toronto, Vancouver, Montréal, Halifax, Victoria and Gatineau have non-resident ownership shares above 1% of the condominium apartment stock.
Montréal saw an increase in the share of non-resident ownership of condominium apartments, rising from 1.1% in 2016 to 1.7% in 2017.
“The share of condominium apartment owned by non-residents remained low and stable in Canada. The lack of growth in Toronto and Vancouver, combined with the increases in Montréal, indicate the possibility of a shift from these centres after the introduction of foreign buyers’ taxes in Ontario and British Columbia. Other factors attracting demand to Montréal include lower housing prices and a relatively strong economy. It should be noted that foreign ownership is just one of the factors influencing Canada’s housing markets. Other important factors include housing and land supply constraints as well as the economic and demographic fundamentals that drive housing demand,” says Bob Dugan, Chief Economist, CMHC.

Happy Holidays

We would like to take this opportunity to wish you and your families a safe and happy holiday season and an even better new year.

Construction intentions for multi-family dwellings in Montréal continue to climb

In October, the value of permits for both single-family and multi-family dwellings increased in the CMAs of Montréal and Toronto. However, in the Vancouver CMA, both residential components fell, offsetting the gains in September.
Municipalities in the CMA of Montréal issued $538.1 million in permits for multi-family dwellings in October, higher than in Toronto ($409.2 million) and Vancouver ($330.6 million). In regards to single-family homes, Toronto registered $451.3 million in permits, followed by Vancouver ($148.1 million) and Montréal ($122.4 million).
The Montréal CMA issued permits approving the construction of 2,956 new units, stemming mainly from multi-family dwellings (2,720). October marked the fifth consecutive month where the number of units approved for multi-family dwellings exceeded 2,000. Vancouver approved the construction of 1,860 new units for multi-family homes, while Toronto (1,691) approved fewer despite having a higher value for the component.