Factors affecting Canadian mortgage rates are always in motion and tend to have a significant impact on housing markets across the country as well as the monthly mortgage payments that Canadians make. Government regulations also impact mortgage qualification criteria and housing affordability. Until early this year, mortgage rates had been rising and when coupled with a series of new government regulations, most notably the new stress test for uninsured mortgage applicants that was introduced in January of 2018, seriously put the brakes on housing markets across Canada. Many experts affirm that this intervention was necessary in over-heated markets like Vancouver and the GTA. However, there is a growing consensus that the impact was too strong and slowed Canadian housing markets too quickly, making access to the market, especially for potential first-time buyers, simply out of reach.
Current mortgage rates are at a 2-year low, mostly due to very low bond yields driven by the economic uncertainty of an escalating trade-war between the U.S. and China, initiated by tariffs imposed by President Trump, which were also recently targeted at Mexico, prior to some intense negotiations. However, as soon as mortgage rates start to increase again, many of the regulatory factors initiated to intentionally slow down the Canadian housing market will come to the forefront once more, especially as we close in on a federal election this fall. In this blog post, Hatch looks at some of the leading ideas to counter-balance these effects and soften the blow to mortgage applicants.
First Time Home Buyer Incentive by CMHC
Recognizing that the cumulative effective of new regulations and rising interest rates were taking too much of a toll, in March, the federal government introduced a new measure in the 2019 budget to directly assist new homebuyers, dubbed: “The First Time Home Buyer Incentive.” Under this program, CMHC would provide an essentially interest-free loan for up to 10 per cent of the purchase of a newly constructed home, or 5 per cent of the value of a resale home. Only families with a household income of less than $120,000 per year would qualify for homes valuing up to 4 times their annual household income, or maxing out at $480,000.
The federal government has earmarked $1.25 billion over three years for this “shared equity mortgage,” which would see CMHC take a corresponding equity stake in the home to be paid off later. The precise details of this new program will be unveiled in the fall, just in time for the October election. The government estimates the potential savings for the average mortgage holder to be over $2,000 per year and that the “plan could create about 100,000 new first-time buyers over the next three years.” – CBC
10-Year Mortgage Terms
Last month, the Governor of the Bank of Canada, Stephen Poloz, acknowledged the issue of barriers for first time homebuyers, affirming the shared-equity mortgage as a solid incentive to be in place this fall, and offered an additional suggestion to help stimulate home buying activity in Canada: longer mortgage terms. Poloz asserts that longer terms, such as a 10-year fixed mortgage would mean that mortgage holders would have to face fewer renewals and the risks of higher rates that more frequent renewals entail. He also stated that policy makers would benefit from the increased stability related to fewer renewals.
Private Mortgage-Based Securities
Stephen Poloz also claims that there is some appetite in Canada to create a private market for mortgage-backed securities as a more flexible source of long-term funding for mortgages not insured by CMHC, but this suggestion comes with an obvious caution:
They would have to be designed carefully, he said, because mortgage-backed securities were central to the “sub-prime debacle” ahead of the financial crisis more than a decade ago. – CBC
Easing the Mortgage Stress Test
Perhaps a more viable solution might be to adjust the stress test that has caused such a drastic shock to housing markets across the country. Several experts contend that the stress test had its intended effect of slowing the Canadian housing market, which was appreciating in 2015 and 2016 especially in Toronto and Vancouver to the point where home ownership for many folks in these communities was simply unaffordable:
Benjamin Tal, deputy chief economist at CIBC, describes Canada’s housing market as experiencing “a very healthy adjustment,” and notes that the housing markets of Toronto and Vancouver have slowed the most, which isn’t surprising. – Advisor.ca
Although the stress test was very effective at slowing the market, in a report released in April, Tal questions the degree to which the stress test was applied, asserting that 200 basis points above prevailing rates was perhaps two high, especially when combined with rising interest rates:
The stress test imposed on the market was probably necessary, since there was a need to save some Canadian borrowers from themselves. But is 200 basis points the right number? At the end of the day, there is no real science behind that number. Let’s remember that the rule was introduced in an environment of an already slowing market, and that since then, the Bank of Canada has hiked rates by 75 basis points, and the five-year mortgage rate has risen by 35 basis points. – CIBC Capital Markets
Another report, authored by economist Will Dunning for Mortgage Professionals Canada, suggests that the qualifying rate for the stress test should be 75 basis points above prevailing rates, which would account for the borrower’s growth of future income, as average personal income has risen by 12.5 per cent over the last 5 years.
Roll back to 30-Year Amortization
Prior to the federal government’s 2019 budget, there was some speculation that finance minister Bill Morneau might opt to roll the amortization period back to 30 years, where it was prior to former Finance Minister Jim Flaherty capping the amortization period at 25 years on July 9th, 2012. At the time, mortgage rates were hovering around 5 percent and there was concern of an overheating housing market and that Canadians were too heavily leveraged in general. The change to a 25-year amortization meant that fewer Canadians would qualify for a mortgage as monthly payments would increase by a couple hundred dollars. However, mortgage holders would pay tens of thousands less in interest over the life of a 25-year mortgage vs. a 30-year mortgage.
Another option would be to look at regionally based incentives based on prevailing market conditions in specific areas. After all, rapid growth in the GTA and Vancouver were skewing the market in 2015 and 2016, which instigated regulations by way of a foreign buyer’s tax in Ontario and B.C. aimed specifically at slowing the markets in these huge urban areas. The reverse could be applied to other areas of these provinces and indeed parts of the country where appreciation has been much more modest. For example, the stress test criteria could be lowered based on the region in the country where the home purchase is made. The same kind of logic could be applied to the shared-equity mortgage, in terms of what percentage would be offered interest-free by CMHC in the Fall.
We Invite Your Feedback
Since many financial experts are weighing in as to what adjustments should be made to make mortgages more affordable, Hatch would like to invite you, our valued audience and clients to offer your opinion as to which of the above noted approaches would work best. Simply visit our Facebook Page and submit your views in the poll at the top of the page. Equally, if you have a suggestion that we haven’t covered, you can add that in the comments section or simply contact us at Hatch Online Mortgages and drop us a line… we’d love to hear what you think on this issue that affects so many Canadian mortgage holders and applicants!