As expected, the federal government is looking at ways to cool the crazy housing market by making changes to the mortgage stress test.
Among other reasons, low interest rates have helped to fuel the current state of the housing market which now at one of the fastest paces its ever been. Prices have increased exponentially causing government fears that if interest rates increase, home owners may no longer afford the mortgage debt they have taken on.
The Office of the Superintendent of the Financial Institutions (OFSI) proposed changes on Thursday April 9, 2021 to the qualifying rate for uninsured mortgages.
This proposal includes an increase to the qualifying rate from the current 4.79% to 5.25%. This will reduce the amount of mortgage many will qualify for by 4%. For example – with a 4.79% qualifying rate, a person with a $100,000 annual income, amortized over 25 years, property taxes of $300 monthly, will qualify for a mortgage of $500,255. If the 5.25% passes they will then qualify for $478,253. A reduction in purchasing power of $22,000, just over 4%.
Some economists think this is too little, while some think its unnecessary. The fear is that real estate has been a driving force in keeping our economy alive and that the government must be very careful in the choices they make. They don’t want cause further economic disruption.
For instance, as per the Barrie and District Real Estate Association, the average home price in the city of Barrie has increased by 35% over the same time last year.
OSFI has begun the consultation process and is taking submission until May 7, 2021 with a target of June 1, 2021 for the change to the mortgage stress test.
Government watching closely
Chrystia Freeland has signaled that she will be paying close attention to the housing market and will be watching the regulator closely “to inform potential steps the government may take”.
It is likely that if the government increases the stress test for uninsured mortgages (those with more than 20% down payment/equity), they will most likely do the same for insured mortgages.
The chief banking regulator, Jeremy Rudin, said that he will be monitoring lenders to ensure that they adhere to rules around income verification and don’t extend amortization periods or debt servicing limits.
Demand is out pacing supply which is one of the causes of this upswing in pricing and frenzied sales environment. Hopefully, we will regain more supply once covid is over as people begin to feel more comfortable with welcoming buyers into their homes. We also need new home construction to catch up with demand as well.
Click here following article in Mortgage Broker News for more in depth details.
Or if you are video inclined, click here for this one from Bloomberg.