CMHC Stands By Mortgage Stress Test Despite Calls To Soften Rules

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The CEO of Canada Mortgage and Housing Corporation is standing by the mortgage stress test, despite claims the rules are too strict for prospective home buyers.

“The stress test is doing what it is supposed to do,” wrote CMHC’s president and CEO Evan Siddall in a letter to the Standing Committee on Finance.

READ: ‘Affordability Would Be Impacted’ If Stress Test Removed: TD Economist

His letter, dated Thursday, was in response to claims by the Canadian Home Builders Association (CHBA), Mortgage Professionals Canada (MPC) and the Ontario Real Estate Association (OREA). All three organizations argue the stress test rules need to be softened.

“My job is to advise you against this reckless myopia and protect our economy from potentially tragic consequences,” Siddall wrote. “Please look past the plain self-interest of the CHBA, MPC and OREA and see house price moderation as helpful: an intended consequence.”

READ: Lack Of Supply, Stress Test Top Issues In Toronto’s Spring Housing Market

House prices have dropped by 3.4 per cent nationally since the mortgage stress test was initially introduced in 2010, according to Siddall. However, he says the proposed changes by the CHBA, MPC, and OREA could potentially drive these prices up by one to two per cent in big cities. It would also encourage Canadians to borrow more money, thus causing some to fall further into debt.

The stress test currently requires mortgage applicants to prove they can pay their qualifying interest rate plus two percentage points or the Bank of Canada’s five-year benchmark rate (whichever is greater).

MPC wants this two percentage point dropped to three-quarters of a per cent, in addition to seeing lenders allow 30-year amortizations. The longer amortization period would essentially mean smaller monthly payments for homeowners.

READ: Longer-Term Mortgages Can Lead To A Safer Economy: BoC Governor

Similarly, CHBC wants 30-year mortgage terms to be an option for Canadians and wants to see a sliding scale for the stress test, meaning “the longer the term, the smaller the stress test percentage,” the Canadian Press reports.

And as for OREA, they just want the mortgage stress test rules to be regularly reviewed. “We certainly support government programs that encourage responsible and sustainable borrowing,” OREA CEO Tim Hudak previously said, “but this pile-on of all kinds of new rules, regulations and taxes harms aspiring homeowners and sets back the potential of our economy.”

READ: 7 Questions Buyers Should Ask Their Mortgage Lenders

In his letter, Siddall noted that CMHC “will of course, continue to monitor housing markets to ensure that the stress test and all sandbox measures are having the desired effects.”

“The Minister of Finance or OSFI may make changes in the future,” he added.

READ: 5-Year Forecast Shows Canadian House Prices Will Rise In All But 2 Cities

The stress test has made it more difficult for some prospective buyers to qualify for a mortgage and enter the market, thus causing some organizations to claim the test does not help Canada’s affordability issue.

However, in his letter, Siddall argued “high house prices are the overwhelming reason why home ownership is out of reach,” not the stress test, which is why the strict rules are necessary. 

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