Weekend Reading: Mortgage Stress Test Edition

For several years the federal government has tightened mortgage rules with the goal of slowing down rising home prices in booming markets like Toronto and Vancouver, and ensuring home owners weren’t getting in over their heads by taking on too much debt. The mortgage stress test, first introduced in 2016 and then expanded in 2018, made would-be home buyers prove they can afford a payment based on the Bank of Canada’s benchmark five-year posted rate (currently 5.19%) rather than the bank’s discounted rate (currently less than 3%).

The mortgage stress test has been widely criticized by the real estate industry as an unfair burden for otherwise well-qualified borrowers. In a surprising announcement this week, the Department of Finance said it will revamp the stress test for insured mortgages (for those who put down less than 20%) effective April 6th.

The Canadian Mortgage Trends website breaks down the changes here:

  • Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
    • Based on the Big 6 banks’ posted 5-year fixed rates.
  • New stress test rate (if it were in effect today): ~4.89%
    • Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

The author says this change will help the average home buyer by decreasing the income required to buy a $300,000 home by roughly $1,500, and allow those who can easily pass the stress test to purchase about 5% more home (someone who qualified for a $500,000 mortgage (previously) will qualify for $525,000 in April).

In reality, this doesn’t do much to help home buyers qualify for a mortgage. In fact, mortgage expert Rob McLister says the looser mortgage stress test may stoke the market and drive prices even higher:

“Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.”

I understand why mortgage professionals and wannabe home buyers are frustrated by tight borrowing guidelines. But it wasn’t that long ago when we had 35 and 40 year mortgage amortization and zero-down mortgages.

We’ve tightened lending over the past decade to avoid the type of housing crash that occurred in the U.S. ahead of the great financial crisis. By all accounts it has worked. No need to swing back the other way and completely loosen our lending standards.

This Week’s Recap:

Earlier this week I wrote about whether it makes sense to defer OAS to age 70. As with most personal finance decisions, the answer depends on a number of factors.

Then we had a guest post from Steven Arnott, author of The Snowman’s Guide To Personal Finance, on how to become the CFO of your own personal finances.

Many thanks to Rob Carrick for highlighting my guide for the anti-RRSP crowd in his latest edition of Carrick on Money.

Over at Young & Thrifty I wrote about the best low-risk investments in Canada.

I also looked at the difference between index funds and mutual funds.

From the archives: A look at my mortgage renewal strategy.

Over at Rewards Cards Canada you can find the best Aeroplan credit cards in Canada.

Weekend Reading:

A major downgrade to Rogers MasterCards this week. The Rogers World Elite MasterCard got hit the worst, including a new eligibility criteria I’ve never seen before where cardholders must spend at least $15,000 per year on the card or else they’ll be downgraded to another card. Brutal.

From the brilliant Morgan Housel – History is only interesting because nothing is inevitable.

Mr. Housel also lists 100 little ideas that help explain how the world works. One of my favourites:

Ringelmann Effect: Members of a group become lazier as the size of their group increases. Based on the assumption that “someone else is probably taking care of that.”

In his latest Common Sense Investing video, PWL Capital’s Ben Felix looks at whether the value premium is dead:

Do you have a defined benefit contribution plan? Rob Carrick explains how to get the most out of it.

Her husband told her not to work, then cut off her money — here’s how financial abuse traps women.

With RRSPs, there is a time to contribute, there is a time not to contribute and there is a time to withdraw funds — choose wisely.

Here’s Dale Roberts on how to use your RRSP and TFSA to play retirement portfolio catch-up.

Nick Maggiulli has a terrific post explaining why avoiding bad decisions is more important than making great decisions:

“Too many people in the financial community obsess over the “optimal” way to invest when their time would be better spent steering clear of actions that could lead to ruin.”

The F.I.R.E. movement is relatively new but here’s a neat story about how Canadian personal finance blogger Bob Lai grew up with a father who retired at age 43.

Preet Banerjee uses a great example to explain the basics of risk transfer when it comes to life insurance:

In a Globe and Mail column, Preet Banerjee explains why older, actively trading men are more likely to be victims of investment fraud.

Tim Cestnick writes about the best approach to figuring out how much money you’ll need in retirement.

Finally, NPR reports that more employers are looking into the benefits of a 4-day workweek. Nice!

Have a great weekend, everyone!

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9 Comments

  1. Denis on February 23, 2020 at 4:54 am

    “Preet Banerjee explains why older, actively trading men are more likely to be victims of investment fraud.”

    The article paints a poor picture of men and if you read the comments, many were ticked off that he threw in the unnecessary gender bias poke at us. I worked my career in IT and men/women were paid the same and had the same opportunities at BMO, CNR and at a small company. Saying that men and women have not been paid the same sells papers and make today’s media junkies feel good I guess. I’d like to see the criteria for those studies to see if they are comparing apples with apples as the cliche goes.

    • Beth on February 23, 2020 at 12:06 pm

      How do you know men and women were paid the same and got the same opportunities? I’m not trying to be snarky – I’m genuinely curious. I think it would be awesome to have that level of transparency in an organization 🙂

      I wish I could find a place like that. My lived experience has been very different.

      • Denis on February 23, 2020 at 5:02 pm

        All 3 companies I worked at from 1979 to when I retired had that. I never saw otherwise. I am asking to see the critria that has lead to this. I think politicians and media made this up to look good and sell papers. Maybe some industries or small business was true.

        • Beth on February 29, 2020 at 7:21 am

          “I never saw otherwise” doesn’t mean it wasn’t happening – just that you personally didn’t experience it or that someone didn’t disclose their experiences to you.

          That being said, I think it’s healthy to question what we see in the media – but it’s also healthy to question our own blindspots.

  2. Gin on February 24, 2020 at 9:45 am

    The fact that the gender pay gap persists is well documented, for example https://www.theglobeandmail.com/news/national/gender-pay-gap-a-persistent-issue-in-canada/article34210790

    Some workplaces are more equitable than others, overall it is clear there is still a gap in pay.

    • Denis on February 26, 2020 at 5:29 am

      To quote a newspaper is not a valid quote, seeing how the media likes to sensationalize and is often wrong.

      It just sounds good in this day and age. I have yet to see it.

      I would like to see the criteria to see that they are comparing apples with apples. If this was true in actual companies, you don’t think it would be all over all media, not a biased one like the Globe and Mail? Same effort, same real education (not ie. a psychology degree ), etc

      I know if they did, it could be easily disproved.

      • Gin on February 26, 2020 at 7:29 am

        Hi Denis, I quoted the article as it is based on Statistics Canada data. This is not an opinion piece. Opinions not substantiated by data are easy to come by. It would be interesting to see credible sources of national data that substantiate equal gender pay.

      • Beth on February 29, 2020 at 7:07 am

        Here’s an example: Universities have done equity reviews and ended up having to raise the salaries of many female professors (and give back pay). Same jobs, same qualifications, same education, same experience – but huge systemic inequities. (There are dozens of examples you can google if you want.)

        It’s much harder to prove in the private sector because there are often weasely little ways leadership tries to justify paying someone more – it’s purely subjective. (For instance, the excuses the BBC tried to use to justify the pay gap between two of its staff – one who reported real news and one who basically reported entertainment gossip. https://www.nytimes.com/2019/10/28/business/bbc-unequal-pay-gender.html) Inequities are usually blamed on the workers rather than the system (you aren’t working hard enough.)

        I’m not trying to be a jerk here – it’s just that we all have blindspots when it comes to things we haven’t experienced personally. But it’s important to realize that just because you don’t see something happening, doesn’t mean it isn’t happening. People are very very good at hiding problems for fear of reprisal, job loss, not being believed, being bullied, etc. It’s also possible that we don’t see or hear of things because people feel they can’t confide in us – because we’re part of the problem.

  3. J-Bay on February 24, 2020 at 7:13 pm

    I am no longer able to access links to Globe and Mail articles referenced under Week-end reading. It appears one has to be a G&Mail subscriber in order to read these articles. Is there a way to access them for non subscribers?

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