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Opinion: Winners and losers under new mortgage ‘stress test’

It’s been two weeks since the new mortgage ‘stress test’ was introduced across Canada, and it’s already becoming clear that there are many people who will struggle under the new rules – and others who will benefit.
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It’s been two weeks since the new mortgage ‘stress test’ was introduced across Canada, and it’s already becoming clear that there are many people who will struggle under the new rules – and others who will benefit.

For those who aren’t familiar, the strict mortgage qualification rules now require that all new mortgage applicants are in a financial position – based on current income minus debts – to pay off their mortgage at the Bank of Canada’s posted rate (currently 4.99 per cent). That doesn’t mean this is the interest rate they will actually pay – mortgage holders will still pay the discounted rate offered by their lender – but it means that they are required to have that buffer in case rates go up in future, or they hit financial difficulties down the road.

The higher qualification rate dramatically reduces many buyers’ purchasing power, by up to 20 per cent – essentially, forcing buyers to choose a less-expensive home to save them from themselves. This results in many buyers having to purchase smaller or less well-located homes than they could have bought under previous qualification rules.

So it’s clear that many buyers – especially first-timers – are (arguably) losing out under the new rules. But what about other groups? Here are some clear winners and other losers.

Landlords vs renters

Buy-and-hold real estate investors who rent out their investment properties are likely to be big winners under the new system. Why? Because a chunk of current renters will be putting off their home-purchasing decisions as they find themselves unable to get into the market. As a sweeping generalization, renters typically have lower-than-average incomes and are more likely to struggle to qualify for mortgage on a home in their desired area under the new rules. Human nature dictates that many of those people will choose to continue to rent in their neighbourhood rather than buy a home in a less desirable area.

Crystal Ross, owner of Investors Property Management, told real estate investment website Canadian Real Estate Wealth, “With the mortgage rules changing, what we used to consider an A+ tenant [high income, good credit], who would usually only stay in a rental unit for about a year and then move onto purchasing their own home, are now staying for two to four years on average.”

The new rules may have been introduced to help stem household debt by forcing Canadians to be more careful with their home purchases, but they may also have the added effect of keeping some Canadians out of homeownership entirely. And the landlords who are already in a strong position benefit further – and are not themselves harmed by the mortgage rules, as they tend to have much lower mortgages and higher down payments on investment properties, and therefore easily qualify under the stress test.

Condo sellers vs house sellers

You might think the struggles facing first-time buyers will result in fewer purchases of lower-end homes, but experts say that this is unlikely to be the case. Real estate brokerages such as Royal LePage predict that there will be a trickle-down effect, with buyers who would have previously bought houses and townhouses now only qualifying for condos. So, while condo sales are predicted to remain robust – albeit from a new set of higher-income buyers – sales of larger homes could take a hit.

Indeed, Randy Ryalls, general manager of Royal LePage Sterling Realty, said last week, “By diluting prospective homeowner’s purchasing power, these regulations will likely place many purchasers into the entry-level market, causing the segment to overheat further.”

Add to that the desperate lack of supply of entry-level homes, especially in hot markets like Vancouver and Toronto, and condo sellers will likely continue to be winners even under the new stress test.

Bonus losers: Mom and Dad

Another group that could lose out? Parents with adult children living at home – for two reasons. Mom and Dad will get stuck with their kids living in the basement for an extra few years, being unable to qualify to buy a home or find an affordable place to rent. The alternative is that the parents will have to shell out that much more money to help their children with a down payment large enough to reduce the mortgage they’re trying to qualify for.

Either way, it’s gonna hurt.