Stress Test Dropping

This has been a busy week in the mortgage world. There were rumblings that the Stress Test was going to be reduced and Evan Siddall, head of Canada Mortgage and Housing Corporation (CMHC), released a three-page document which prompted much debate and feedback.

Normally when I sit down to write my column it flows. Today I am struggling.

I am not an economist. Helping clients buy homes is my bread and butter, so there is no way I can be completely objective with my thoughts about Evan Siddall’s document.

Earlier this year CMHC announced changes to its underwriting criteria. In a previous column  I wrote about what those changes were.

The document that was shared this week was a letter to CMHC Approved Lenders encouraging them to adopt more stringent lending criteria.

While the intent of the recommendations is to prevent Canadians from becoming over-extended, I think we are potentially taking the wrong approach here. I’ve said repeatedly that while reviewing applications, it is not the mortgage commitment that gets clients into financial hot water but other loans and credit card balances.

To be approved for a mortgage, clients go through a rigorous application process and must produce a multitude of documents to help confirm their credit worthiness. Ask anyone who has recently been down this road and they will tell you how much fun this is.

On the other hand, they can walk into a car dealership or furniture store and be approved for credit within minutes.

One of my concerns about further tightening mortgage guidelines is the effect it has on buyers trying to enter the housing market.

I am frustrated when I see families that I sense will never miss a mortgage payment unable to qualify to buy a home.

I am working with a young couple that makes $90,000 per year between their two salaried positions. They are conscientious savers and limited credit seekers. They do have a small car payment but otherwise pay their credit cards monthly and add to their savings each pay day. Their credit is squeaky clean.

An annual family income of $90,000 is not chump change.

They will not be able to afford a single-family home in their city. They are having difficulty finding a condo in their price range in their market. To buy a two-bedroom condo they have set a price point of about $375,000.  With their mortgage payment, strata payment, and property taxes they are looking at a commitment of about $1950 per month.

Their current rent payment for a similar unit is $2400 per month.

Based on their application they are qualified to purchase a home with a price up to about $425,000 but they have decided on a monthly amount they are comfortable paying and don’t want to go any higher than the $375,000 price I started with.

Their approach is not unique. Many of my clients choose a price point based on what they are comfortable paying monthly as opposed to what they are qualified to borrow.

Today the Stress Test drops from 4.94 per cent to 4.79 per cent.

What does this mean in terms of increased borrowing power?

For this young couple it means an increase of approximately $10,000 if what they are qualified to borrow. It may not sound like much, but for some clients it will make a difference.

I went off on a bit of a tangent there but circling back my point is that I don’t feel that making it more challenging for Canadians to buy a home is the right approach.

Should everyone be able to own a home? Buying a home in Canada is a privilege, not a right. Continually moving the goal post and making it harder for people to buy a home benefits landlords and drives people to try to circumvent the rules.

Prudent mortgage lending guidelines are important, no question. No one wants to see people defaulting on their mortgage payments because they are in over their heads.

It is important to note that there are two other companies that provide mortgage default insurance.  Neither of these companies have chosen to follow CMHC’s lead, and it will be interesting to see what happens long term.