Federal changes to mortgage insurance has made life a little more challenging for those looking to purchase a home.
As of Oct. 17, all insured mortgages with a down payment of less than 20 per cent have needed to qualify at a Bank of Canada benchmark rate of 4.64 per cent or the contract rate. This ‘stress test’ ensures a borrower’s ability to make mortgage payments at a higher interest rate.
“It’s mortgage default insurance,” said Angela Zumbo of The Mortgage Centre. “It protects the lender in the event that the buyer goes into default.”
Before last Monday, the stress test only came into play on anything less than a five-year fixed term.
“The effect on the homebuyer is in effect a reduction in purchasing power of 20 per cent,” Zumbo said. “They (government) want to slow it down, especially in runaway markets like Vancouver and Toronto. Unfortunately, we’re collateral damage.”
While it makes sense for most, Zumbo notes the buyers who are in a better place when they come up for renewal because their income and family situation has changed.
“But unfortunately, everybody gets painted with one brush,” she said.
“It’s (stress test) a little artificial,” mortgage consultant Mackenzie Gartside said. “Government has made everyone qualify by a Bank of Canada benchmark rate, so it’s given a lot more control to five or six major entities, which reduces a lot of competition in the market place.”
A few years ago, she notes government reduced the maximum amortization from 30 to 25 years.
“If a first-time home buyer has a 25-year amortization and they’re making their payments based on their minimum, in five years time they have their mortgage paid down,” Gartside said.
Robb Flannery of Bayfield Mortgage Professionals feels the changes can help protect people from themselves.
“In our industry, we see people that tend to get in on a basis that’s way too tight for them,” Flannery said, noting buyers can become “married to their mortgage” if there’s a bump in rates.
He also feels the changes can create an opportunity for brokers and mortgage lenders.
“We could advocate more for people, even more so now than in the past,” he said.
But Gartside feels the changes could be dramatic enough to put downward pressure on the market.
“To the point where anyone who has purchased in the past couple of years is now going to see a negative equity aspect on their home, and that’s not good for the economy.”
Flannery concurs that a 4.64 benchmark is a little heavy handed.
“A 200 basis point increase in rate is a huge, huge increase,” he said. “If they were to do that overnight, that would absolutely kill our economy from one end of Canada to the other instantaneously.”