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!
