The federal mortgage stress test is 16 months old, but that doesn’t mean that Canadians homeowners and buyers necessarily understand its rules or what it means for their home purchase.
A new TD survey has found that nearly half of Canadians (43 per cent) aren’t confident in their knowledge of the mortgage stress test rules. The poll, of 1,901 Canadians who were either homeowners or planning on buying a home, also found that 59 per cent of respondents don’t understand how the stress test would affect them when buying their first or next home.
The mortgage stress test requires all mortgage applicants to qualify at the Bank of Canada’s posted rate, or their mortgage contract rate plus two per cent, whichever is higher. This is intended to create a buffer against future rate increases or financial hardships, and to ensure buyers don’t overstretch their finances.
Pat Giles, vice-president, Real Estate Secured Lending at TD, said, “It's important to remember that if you're a home buyer and you have a down payment of less than 20 per cent, the way that lenders qualify you hasn't changed… [There was] already a stress test in place for home buyers who have a down payment of less than 20 per cent. The stress test introduced in 2018 is meant to ensure that homebuyers with a down payment of 20 per cent or more can feel confident they're buying the house they can afford, both now and in the future.”
Mortgage rate confusion
The survey also asked Canadians about other aspects of mortgages, and found high levels of confusion in some areas, while respondents were quite knowledgeable in other areas.
More than eight in 10 (81 per cent) said that they didn’t understand how a potential rise in mortgage rates would affect their finances.
However, more than half (58 per cent) said they were confident in their knowledge about how mortgage payment pauses or “vacations” work, and 69 per cent were confident in their understanding of mortgage prepayment rules. Only just over one-quarter of Canadians (28 per cent) said they did not understand the difference between mortgage pre-approval and pre-qualification.
Giles said, “Buying a home can be one of the most critical financial decisions someone can make. No matter where you are in the homebuying journey, it’s important to build a strong foundation of mortgage knowledge to ensure you feel prepared and confident at every step.”
He added, “Ultimately it comes down to affordability. A financial advisor or mortgage specialist can help you understand how much home you can comfortably afford while taking into account the full cost of home ownership.”
Time to relax the rules?
The survey results came out on the same day that TD economists issued a note to clients, saying that the stress test has had more far-reaching consequences than expected, and that the federal government should consider being “flexible” with the rules going forward.
The stress test “has lowered Canadian home sales by about 40,000 between 2017-Q4 and 2018-Q4, with disproportionate impacts on the overvalued Toronto and Vancouver markets and on first-time homebuyers,” reads a note to clients April 30 by TD economists Rishi Sondhi, Ksenia Bushmeneva and Derek Burleton.
The economists wrote that if the B20 stress test were removed, home sales and prices would rise by more than the current forecast for a more muted recovery.
“Our current projections call for Canadian home prices to stabilize by mid-year and to be about 4 per cent higher than current levels by the end of next year. However, imagine a scenario where the B-20 was immediately removed. All else equal, nation-wide home sales and prices could be around 8 per cent and 6 per cent higher, respectively, by the end of 2020, compared to current projections. This would amount to about a $32K difference in the average Canadian home price relative to our forecast, with disproportional impacts on the GVA and GTA markets.”
The note concluded, “This speaks to the importance of maintaining flexibility going forward with respect to tweaking the B-20 rules, especially if circumstances change or if housing markets continue to undershoot expectations.”