During this period of unprecedented economic upheaval and financial uncertainty, Canada’s largest banks are offering mortgage payment relief to customers by way of deferred mortgage payments.

All customers who are currently in good standing and have been impacted by COVID-19 can apply for mortgage relief from their bank. Customers will answer a few questions to help their banks direct applications appropriately.

COVID-related mortgage deferral is available for an indefinite period and customers do not face a deadline for having to seek relief. They can approach their bank as the need arises.

Customers should understand that this is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest which would otherwise be part of the deferred payments is added to the outstanding balance of the mortgage. The added interest is incorporated into the monthly payment, either when payments resume at the end of the deferral period or upon renewal at the end of the mortgage’s term.

Banks are encouraging customers to visit their websites for the latest information, rather than calling or visiting a branch.

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By: Myke Thomas

The B-20 mortgage qualifying stress test will be tweaked as of April 6 and, not surprisingly, the bureaucracy is strong in this one.

As it stands now, the stress test requires all borrowers to qualify for mortgages based on the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate from lenders, plus two percent.

On April 6, the federal finance department will introduce a new benchmark rate, which will be the weekly median five-year-fixed insured mortgage rate from mortgage insurance applications, plus two percent.

“Put simply, Canadians will be stress tested at a rate that is about two percent higher than the mortgage rate they are receiving,” says James Laird, co-founder of Ratehub.ca and president of CanWise Financial.

Sure, but the bureaucracy unsimplifies it.

The new benchmark rate will be published every Wednesday and come into effect the following Monday, so, yes, it could change every week.

The decision from the finance department covers only insured mortgages.

Pending a decision by the Office of the Superintendent of Financial Institutions (OSFI), it might include uninsured mortgages.

OSFI sets the minimum qualifying rate for uninsured mortgages. The federal finance department sets the minimum qualifying rate for insured mortgages.

OSFI is considering applying the new benchmark rate formula to uninsured mortgage applications and is seeking input from interested stakeholders on this proposal before March 17.

The bottom line?

“When you get under the covers of the new way of calculating the stress test, it ends up as a fine-tuning of the existing method. A more confusing one for sure and by our math, it increases buying power by about three percent,” says Mark Herman of Mortgage Alliance in Calgary. “It may have a slight psychological benefit as well, but neither of these are really the main issues with Calgary or Alberta home buyers right now.

“However, with the median rate changing every week, how are buyers going to be able to correctly time buying a home based on ‘this week’s median’ or ‘next week’s median.’

“It is going to cause some confusion and more likely some added stress and sleeplessness.”

And added red tape and paperwork.

The B-20 stress test was introduced two years ago specifically to cool the over-heated Toronto and Vancouver markets and Herman thinks the new tweak has the potential to add some new heat to those markets.

“For buyers in Toronto and Vancouver, it will turn a maximum $500,000 purchase into a $515,000 purchase, so again, not a big deal,” he says. “But with increasing prices in Toronto, you can bet that the added three percent of purchasing power will get added to the purchase prices right away, as buyers push as high as they can to outbid others and get into their own home.”

Laird expects the stress test rate will drop to about 4.89 percent by April 6, assuming current market rates.

“Canadians who are getting insured and insurable mortgages can expect to qualify for a little bit more than what they can today,” he says. “Home buyers who cannot currently qualify for what they want, but are close, should redo their qualifying calculations using the new stress test.

“According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 10 percent downpayment and five-year fixed mortgage rate of 2.89 percent, amortized over 25 years would have qualified for a home valued at $511,424 under today’s 5.19 percent qualifying rate.

“Under the new stress test rate of 4.89 percent, they (would be able to) afford $526,632.”

Obviously, any effect the tweak has will be determined by interest rates, says Colin Guldimann, an economist with RBC Economics.

“Overall, much will depend on how rates move in the near term. Our forecast calls for a rate cut by the Bank of Canada in April 2020,” says Guldimann. “Given the current low level of rates and with markets fully priced for a cut, there is limited scope for market rates to move significantly. Moving to a market-based qualifying rate will likely inject some volatility for households as market conditions pass through to the qualifying rate more quickly. While the new test may lower the bar as of April, it may make qualifying a bit more difficult if rates start to rise, as they did in 2018.”

The B-20 was often criticized by home builders, realtors and politicians for not taking into account the regional housing differences and economies in markets across Canada.

As recently as January, Phil Soper, president and CEO of Royal LePage, urged the federal government to take a regional approach to the mortgage stress test, if and when the regulations were changed.

“The stress test pushed people out of real estate markets across Canada temporarily. For the most part, buyers have adjusted, yet it still represents a significant hurdle as families pursue the dream of owning their own home,” said Soper. “We believe policy makers have the necessary experience to modify the tool to meet the reality of today’s Canada and that is, we have very different and varied economies and by extension housing policy needs, from region to region.”

Apparently, that tool was left in the box.

Tweaking B-20 is a good move. Adding regionality would make it a great move.

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New rules will be in force as of April

By: Peter Evans

Starting in April, the government will change the rules that cover mortgage lending in a way that should, in the short term at least, make it easier to qualify for a loan to buy a home.

The Department of Finance says that as of April 6, the so-called “stress test” for mortgages will be calculated in a new way.

The stress test was implemented in January 2018 as a way to let some of the speculation out of the housing market at the time. It does so by making sure borrowers will be able to pay down their debts even if rates move higher. A would-be borrower is tested against his or her ability to pay down the loan at a higher interest rate, and if the borrower fails the test, a lender isn’t allowed to loan them money.

The rules had the effect of cooling the market, especially for first time buyers, which brought down prices in many markets because it shrank the pool of buyers.

At the time it was brought in, the benchmark was set at whatever the five-year posted rate at Canada’s big banks is, which is currently at 5.19 per cent. But under new rules announced on Tuesday and set to be implemented in April, the new bar will be “the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two per cent.”

“This will ensure that people only take on mortgages that are appropriate for the situation, but it does mean the changes in the stress test will be there if the average … rates provided by the banks actually goes down or up,” Finance Minister Bill Morneau said of the changes. “It will actually adjust appropriately to dynamic market conditions.”

The change tinkers with one of the major criticisms of the stress test in the first place, which was that the bar was set arbitrarily high. And non-bank lenders don’t like that the stress test rules give the big banks even more control over the market than they already had. Sherry Cooper, chief economist at Dominion Lending Centres, says the banks would always drag their feet in changing their posted rates, no matter what was happening in the market, “because it’s the rate they use in calculating the penalty for breaking a mortgage,” she said in an interview Tuesday. “This takes the big banks out of it.”

James Laird, co-founder of rate comparison website RateHub.ca, says the industry will welcome anything that gives the big banks less power. “The industry also did not like how the stress test rate didn’t ebb and flow with real rates lowering or increasing,” he said in an interview.

Posted rates at Canada’s big banks are often much higher than rates being offered in the real world and that gap has widened recently. It’s not hard right now to find a fixed-rate mortgage for far less than three per cent, for example, despite the fact that four of Canada’s five biggest banks have a posted rate of 5.19 per cent. (The fifth, TD, lowered its rate to 4.99 two weeks ago. Prior to that it was 5.34 per cent.)

Mind the gap

Ben Gully, the assistant superintendent at banking regulator the Office of the Superintendent of Financial Institutions, said in a speech at the end of January that the watchdog was aware that the gap was a problem. “The difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed,” Gully said.

“We are reviewing this aspect of our qualifying rate, as the posted rate is not playing the role that we intended.”

Tuesday’s rule changes are seemingly a result of that review and will have the effect of thinning out that gap — at least for now. That should make it easier to pass the stress test, and therefore easier to buy a home. Theoretically, that should help bump up prices because more people will be qualified to buy.

A quick look at the numbers shows how.

According to Ratehub, the average rate for a five-year fixed term mortgage is currently 2.89 per cent. Under current rules, a borrower approved for that loan would nonetheless have their finances tested at the five-year posted rate of 5.19 per cent. If they don’t pass the test, they can’t get the loan.

But under the new rules, that same borrower would be tested at 4.89 per cent — a combination of their actual mortgage rate, plus two per cent. That’s a difference of 30 basis points and though small it can add up to thousands more in purchasing power.

Laird calculates that under the old rules, a buyer with an annual income of $100,000 with a 10 per cent down payment would have qualified for a mortgage at 2.89 per cent and could buy a home valued at $511,424 under today’s stress test. Under the new rules, that same buyer can now afford $526,632 — that’s more than $15,000 more purchasing power.

“It’s going to be a welcome change for the mortgage industry and consumers,” Laird said.

Cooper agrees with that assessment. “All other things equal, it certainly boosts buying power,” she said. “And it’s psychologically very positive.”

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Monday Morning Interest Rate Update for February 10, 2020

by Ephraim Vecina

Amid the considerable market impact of the B-20 regulations, multiple observers and industry organizations have called for revisions of the mortgage qualification stress testing, but the chief of the Bank of Nova Scotia has argued that such changes would not address the root of the nation’s housing crisis.

Scotiabank president and CEO Brian Porter recently said that what policies should actually focus on is improving the number of homes available to Canadians.

“I don’t think a lot of tinkering is necessary on the stress test,” Porter said in an interview with the Financial Post last month. “But we have to make sure that these housing markets are in balance. So, rather than look at the demand side of the equation, let’s look at the supply side. Everybody wants to talk about the demand side without looking at the supply side.”

A crucial component of any wide-ranging strategy should be adapting the housing that needs to be built to whatever land is available, especially in geographically challenged markets.

“You can’t have single-family homes in densely populated cities running right up to [Southern Ontario’s] Greenbelt,” Porter noted. “You have to have multi-use facilities, you have to have rental units, you have to have condominiums of some sort. Each of these cities has to rethink their zoning, or application for zoning, policies.”

This is where federal, provincial, and municipal governments enter the picture, as they need to ensure that their respective policies are coordinated towards providing better housing supply.

Porter’s statements came in the wake of Prime Minister Justin Trudeau’s December letter to Bill Morneau, which encouraged the Finance Minister to re-examine the B-20 stress test.

Among Trudeau’s top items for consideration were to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”

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