Let's talk about rates first. This is not the subject of my column, but a little nonetheless. The Bank of Canada surprised us yesterday by raising its key rate by 1.00%, a move of unexpected magnitude, unheard of since 1998.
It is now at 2.50%, and the climb is not over. Likely destination: 3.5% within a year. Remember, we started from 0.25% in January.
To illustrate the impact of these increases, the variable rate mortgage, amortized over 25 years, is used. The policy rate has a direct impact on this. Every time it goes up 0.25%, it costs $25 more per month per $100,000 mortgage.
Year-to-date, the burden of a $350,000 variable-rate mortgage spread over 25 years has just increased by $787.50 per month, or $9,450 per year. Just interest.
And it will get worse. Households will eat their stockings.
Now, let's get to the heart of my subject: imagine that there had not been the mortgage "stress test" so decried by many players in the real estate market.
It would be a disaster.
A brake on real estate
You see, this damn test had the effect of restricting the borrowing capacity of home buyers. How many brokers (real estate, mortgage) said that this measure blocked the path of families to their dream, a bungalow with a courtyard, in the suburbs?
The "stress test" has indeed forced many households to compromise in hot sectors. They had to resolve to settle in a second-choice neighborhood or fall back on a condo.
Yes, it is a brake on the real estate market. And thank goodness there was a "brake"!
The salutary "buffer"
I explain this in more detail below, but basically the stress test is to apply a margin of safety during the mortgage qualification process.
The lender must assess the repayment capacity of the buyer, and this capacity depends, among other things, on the prevailing interest rates. When interest goes up, the maximum mortgage a buyer can access goes down.
The test requires lenders to add 2% to the granted rate in their calculations, or use the qualifying rate of 5.25% (whichever is higher).
It is part of a panoply of measures introduced during the 2010s to alleviate the real estate frenzy. Implemented in 2016, the "stress test", as it is called among the neighbors, was originally aimed at holders of uninsured mortgages (less than 20% down payment). It has since been extended to all loans.
In a normal situation, when real estate is more balanced and no drastic rate hike is on the horizon, the measure may seem exaggerated. In a market like the one we have seen recently, it has contained the surge in house prices and the indebtedness of families. It also protected the financial system. It is today that she is discreetly doing her work.
The safety margin provided was said to be excessive, at 2%. In less than six months, we have exceeded it!
The stress test likely allowed the Bank of Canada to maneuver without dragging the real estate sector into a meltdown.
Stress testing is a requirement of the Office of the Superintendent of Financial Institutions.
A mortgage borrower must meet two ratios, Gross Debt Amortization (ABD) and Total Debt Amortization (ATD). The latter is more complete. It includes all of the borrower's monthly expenses (mortgage, other debts, car payment, property tax, heating costs, condo fees). The sum is divided by the gross monthly income. The result must not exceed 40% (it may be a little higher, depending on the lenders).
The stress test artificially increases the cost of the mortgage, which reduces borrowing capacity.
The Financial Consumer Agency of Canada offers a tool that allows you to calculate the amount of mortgage for which you are eligible:
The tool is available on the Government of Canada website.