In Metro Vancouver, where the gap between incomes and home values makes the region an unaffordable outlier in North America, buyers are especially prone to get hit with unintended consequences of so-called mortgage stress testing.
The test was introduced earlier this year by Canada’s banking regulator to keep homebuyers from taking on risky levels of debt. But the result is reduced buying power that changes what first-time homebuyers can purchase.
It is also affecting people hoping to use an existing mortgage when moving from one property to another.
“If you are selling a place for $750,000 and you have a mortgage of $500,000 and want to buy another place for $1.1 million, you can’t just (necessarily) ‘port’ that mortgage. It doesn’t automatically move,” says Gary Serra, a real estate agent who specializes in downtown and east Vancouver.
If “you have to re-qualify based on the stress test, you may not qualify to borrow (to that level now).”
Maybe, that person’s borrowing limit is $400,000 now. Even carrying over gains in equity, it may not be enough to get a mortgage on the higher-priced property, he says.
On the ground, there are anecdotes about deals not being completed as buyers are caught off-guard when last-minute number-crunching reveals what the new rules mean for them.
Serra says he knows of one recent deal that didn’t complete. “I didn’t represent the buyer, but the buyer was approved and backed out at the last minute because of the stress test.”
He understands there was a firm sale that was subject-free, that is, it would have to go ahead even if financing from a bank fell through. In the end, the bank didn’t approve the buyer’s loan at the amount needed. The buyer “now stands to lose the $36,000 deposit” and it could go to court.
There is about a 20 per cent drop in the amount of money buyers are qualifying to borrow with the stress test, says Justin da Rosa, managing editor at Ratehub.ca, which allows users to compare mortgages and credit cards.
To get a sense of what the change means for buyers in Metro Vancouver, da Rosa punched these numbers into Ratehub’s mortgage affordability calculator: Household income of $110,000 (based on average individual income of $55,000), a 20 per cent down payment, an amortization period of 30 years, the best available mortgage rate of 3.04 per cent, and the stress test qualifying rate of 5.34 per cent (“the greater of the Bank of Canada’s five-year benchmark rate or the contract mortgage rate plus two percentage points.”)
Before Jan. 1, when the stress test came into effect, a borrower with this profile was deemed able to afford a home worth $964,704. After the stress test, ordered by the federal Office of the Superintendent of Financial Institutions, the same borrower could afford a home worth a $735,857.
“It’s not completely dire,” says da Rosa, who spoke to Postmedia from Toronto. “If you go to Zoocasa.com, and you look at the listings in Vancouver, there are 459 listings available (at that $735,000 level) of different home types.”
He adds, however, if you look at the $964,000 range, “there are 815. … There is nearly double the amount of listings at the pre-stress test level.”
“There are ways to work around this,” says Da Rosa. Buyers can defer or buy when they have saved up more money or they can consider a smaller home. Some will rely on gifts from parents and much has been said about the passing of generational wealth from longtime homeowners to would-be ones.
The intention of the stress test was to ensure homebuyers could withstand an increase in interest rates without becoming overextended. Indeed, since it was implemented, there’s been a “triple whammy,” says da Rosa, in that interest rates have increased, but also the Bank of Canada’s five-year benchmark rate on which the stress test is based.
Agents say buyers can “get creative” with options such as combining mortgages and turning to other lenders.
But the Office of the Superintendent of Financial Institutions says in its fine print that the major banks cannot be involved in combining mortgage and other lending products with the intention of getting around set loan-to-value limits, even though brokers are allowed to put together packages of mortgages so long as borrowers qualify for them individually.
There are also other lenders who are partly regulated, but fall outside of OSFI’s reach with the new rules. These include credit unions, but also a descending chain of “A-lenders (major banks) to B-lenders (such as Equitable Bank and Home Capital) to private lending,” says Serra, adding that “B-lending is booming.”