The mortgage stress test been scrutinized ever since its 2018 roll-out. Would-be buyers are often shut out of the market – despite having that 20 per cent down payment sitting in their savings account.
And while the mortgage stress test ebbs and flows with the interest rates, it’s had a huge impact on Canada’s housing market. But now the Canadian Mortgage and Housing Corporation (CMHC) is saying that the stress test has bolstered the country’s financial stability.
Despite rising delinquency rates reported earlier this year from Equifax, a report from CMHC shows that, big picture, these rates have remained relatively low and that the growth in the residential-mortgage market has slowed.
“We believe the market is not growing as fast,” Carlos Mandujano, a senior analyst at CMHC in Ottawa told the Financial Post.
“We’ve seen the stress tests impacting volumes and there’s been an increase in interest rates which is also impacting the number of households that are receiving mortgages.”
Mandujano also suggested that the renewed financial stability was due to the mortgage stress test’s screening of riskier buyers.
“The Canadian bond yield is an indicator of how high, how low mortgage rates will be. So here the message is that long-term funding costs are decreasing and this is causing fixed rates to be low.”
“Right now it would be an incentive to choose a fixed mortgage rate,” Mandujano said.
Still, the drop of Canadian five-year bond rates to 2014 levels of less than 2 per cent could “re-incentivize mortgage credit growth in 2020,” CMHC said.
Another fall-out of the stress test is that more borrowers are turning to non-traditional lenders.
By CMHC’s estimates, the market size for Mortgage Investment Corporations, which aren’t regulated in the same way as chartered banks, was $13 billion at the end of 2018.
And that number is growing at a rate of 10 per cent per year vs. just two per cent for the rest of the sector.
This has led to an uptick in millennials using the services of mortgage brokers (who can browse the world of private trusts companies to secure a mortgage for borrowers who can’t get one through traditional routes).
The drawback is the higher interest rates.
MICs and private lenders’ rates range between seven per cent and 15 per cent. Delinquency rates at credit unions average 0.16 per cent, versus 0.26 per cent at Mortgage Finance Companies and 1.92 per cent at MICs.
With Canada’s financial market so stable, buyers are hoping the stress test might be modified, if only to give a few more hopefuls the chance at home ownership.