The January 1 changes to Canada’s mortgage industry will remove up to 50,000 homebuyers from the market and threaten the entire economy, mortgage brokers warn.
In a report prepared by its chief economist, Will Dunning, Mortgage Professionals Canada (MPC) estimates that 18 per cent of buyers will fail the new mortgage stress test, which requires that all homebuyers qualify for a mortgage rate higher than what is available in the market. The ruling applies to federally regulated lending institutions, which includes all the major banks.
The MPC said that about 91 per cent of new mortgage applicants are subject to the stress test, because it covers high- and low-risk loans. High-risk loans are those with a down payment of less than 20 per cent that require mortgage insurance.
The new Office of the Superintendent of Financial Institutions rules require the minimum qualifying rate for all mortgages to be the greater of the five-year Bank of Canada benchmark rate (currently 4.99 per cent) or 200 basis points above the mortgage holder’s contractual mortgage rate.
After a period of wide speculation, the Bank of Canada has announced on January 17 it will be raising its trendsetting overnight lending rate to 1.25 - up from 1 per cent. This is the third rate hike in a year.
Dunning estimated that the typical homebuyer will have to reduce his or her target price by 6.8 per cent to pass the stress test. In Metro Vancouver, that would amount to approximately $71,000, based on the current composite benchmark price of just over $1 million.
About 100,000 potential homebuyers are expected to fail the stress test, but Dunning forecast that half will acquire financing through alternative lenders such as credit unions, private lenders or other non-federally regulated financial institutions. From 40,000 to 50,000 potential homebuyers will fail the stress test or acquire non-conventional funding and will exit the home sales market, he said.
Vancouver-area mortgage broker Dustan Woodhouse fears that the federal government is moving too fast with lending restrictions and that it could threaten the national economy.
“I believe they’re trying to fix a problem that doesn’t exist,” said Woodhouse, a senior broker with Dominion Lending Centres, adding that homebuyers taking on larger mortgage payments will have an impact on the overall economy.
“If the economy contracts just a little bit, Canadians who have big mortgage payments will continue making them and won’t spend money elsewhere in the economy,” Woodhouse told Mortgage Broker News.