Conservative Party leader Andrew Scheer has vowed to zero in on the mortgage stress test and extend mortgage amortization periods if his party is elected this October, while the Liberals are hoping their first-time buyer program can help more Canadians enter the housing market.

 

Here's what you need to know about the three primary housing-related measures on the table in this election and how they impact the local market.

 

Introduced in mid-2017 by the Office of the Superintendent of Financial Institutions (OSFI) as a means if keeping Canadians from becoming financially over-leveraged in a rising interest rate environment, the stress test has been largely decried as an instigator of emotional duress rather than an enabler of better choices.

 

 

Initially, the test was only applicable to high ratio mortgages, meaning mortgages with a down payment commitment from the purchaser of under 20% of the purchase price. The test was later expanded to include all purchasers seeking a mortgage.

 

The theory behind the test was to ensure Canadians could maintain their monthly payment obligations at interest rates roughly 200 points, or two percentage points, higher than the mortgage rate being offered by their lender.

 

For example, a purchaser applying for a $400,000 mortgage at an interest rate of 3.5% would be ‘stress tested’ as though their mortgage payment was at a 5.5% interest rate, an approximate difference of $442 per month.

 

In other words, failing the test would force a would-be homebuyer to seek a less expensive purchase. But that, as Victorians know, is easier said than done in a housing market commanding some of the highest real-estate prices in North America where entry-level home costs reflect mid-to-upper property valuations in other jurisdictions.

 

Despite the OSFI’s intentions to keep Canadians from approaching unmanageable housing debt, during the test’s inaugural three-year span mortgage rates actually fell, and the Bank of Canada recently signalled that a weak economic outlook could see it drop the country’s key lending rate for the first time since 2015 which would yield even lower mortgage rates.

 

And by design, the obstacles presented by the stress test may not end once financing is secured and is bought.

 

At renewal time (often every five years), the OSFI has empowered banks with a tool to keep existing mortgage clients from renewing their mortgages with competitors. How? Switching institutions triggers another stress test. 

 

If a homeowner is approaching their renewal period and a competing lender is offering more favourable terms, that homeowner must pass another round of testing in order to qualify for the competitor’s mortgage. Although for many homeowners that does not present an insurmountable challenge given that most Canadians will see higher earnings over a five-year period, the regulations keep some purchasers locked in to whatever terms their initial lender is willing to offer upon renewal and not what the open market can provide.

 

Last year the value of new mortgages in Canada fell by upwards of $15 billion as a direct result of the stress test, according to CIBC which issued a report highlighting that nation-wide new mortgage business dropped by $25 billion due to a softening economy and tight lending regulations.

 

With banks now on the losing end of the OSFI's policy, homebuyers locked out of the market, interest rates falling and Canadians still struggling to buy their first home, it may be high time to review the stress test and consider curtailing its terms or removing it altogether.

 

But that’s not all that could come about following the election.

 

Scheer has vowed to raise mortgage amortization periods to 30-years from 25-years, effectively increasing the mortgage pay-back period while decreasing monthly mortgage costs. Although most financial advisors will recommend sticking with a traditional 25-year amortization, for some purchasers in expensive markets like Victoria’s the additional five-years for amortization can lend a helping hand for a purchaser on the cusp of qualifying for a mortgage.

 

Despite the roadblocks introduced during their term, Justin Trudeau’s Liberal government recently introduced the First-Time Home Buyer Incentive program that is intended to help first-time purchasers buy a home.

 

To qualify, the purchaser must earn a maximum pre-tax income of $120,000 and the purchase price of a home is capped at approximately $530,000. The maximum purchase price is reduced in-step with a purchaser’s annual income.

 

The way the incentive works is the federal government will append upwards of 10% of a pre-sale or new-build property’s value to the purchaser’s downpayment, for a 10% equity stake. Re-sale inventory is eligible for a 5% top-up from the government in exchange for a 5% equity stake.

 

Should the property be sold, the government will reclaim its initial investment, plus 5% or 10% of the value uplift, or the purchaser can pay back the government over an extended period.

 

Considering the program is in its infancy, few potential purchasers have used the measure to purchase their first home or a pre-sale offering.

The maximum value limits also preclude individuals from the likelihood of purchasing a single-family-dwelling or a townhome in the Capital Region, given the valuation of those properties. The program, at least locally, is geared towards the purchase of condominiums. C

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