Calls grow for changes to mortgage stress test in Canada

By Martin MacMahon and Hana Mae Nassar

There’s a push from the real estate industry to adjust the mortgage stress test formula, given how much has changed since its introduction.

The tool forces homebuyers to prove they can still make monthly mortgage payments, even if interest rates rise.

However, with many believing interest rates have peaked, some in the industry, like RE/MAX Select real estate agent Keith Roy, feel the stress test made sense when it was brought in, when “rates were at an all-time historical low.”

“The anticipation was that rates would rise. They’ve risen now. Unless the office and the government believe rates are expected to continue to rise further, I think the stress test has probably served its purpose and now it’s just preventing people who could otherwise afford a home at historically normal rates, it’s just preventing them from being able to purchase a home,” he told CityNews.

“There weren’t a lot of calls from the real estate industry to not bring the stress test in when it came. When the stress test was announced, most of the real estate industry was pretty supportive of the idea, recognizing that we were at a juncture in history where interest rates were their lowest ever. I think it’s outlived its usefulness if we believe that rates have, more or less, peaked on this current cycle.”

Come the spring, Roy says the stress test will be “problematic for a lot of people” who will likely be unable to get into the real estate market.

Royal LePage chief executive Phil Soper says he’d like to see the Office of the Superintendent of Financial Institutions tinker with the formula.

“The amount of interest rate hurdle that people have to deal with now at the end of 2022 is significant so it makes sense that policymakers would look to mitigate it a little bit, just cutting the stress test hurdle, say, in half,” he explained.

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“I would suggest that it is time because default rates are so low. Less than a quarter of one per cent of people, so 99.75 plus per cent of Canadians, are meeting their commitments on their mortgage. There’s room to reduce the gap and introduce something of a break.”

The comments come a day before the banking regulator is set to share its annual review of the stress test Thursday. It’s unlikely any immediate changes will be announced.

Last week, Superintendent of Financial Institutions Peter Routledge wrote “we see great risk in speculating on the mortgage rate cycle and we do not consider the [stress test] to be a tool to manage the demand for housing.”

Roy says those most likely to be affected by the stress test are first-time buyers on an income trajectory, noting the issue isn’t isolated to just Vancouver.

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