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Higher BoC 'Stress Test' Rates and Expected Home Value Impact

Higher BoC 'Stress Test' Rates and Expected Home Value Impact

by Yvonne von Jena | May 11, 2018

The interest rate used by the Bank of Canada for mortgage stress testing went up by 20 basis points last week to 5.34% from 5.14%, where it had been since mid-January of this year. It has now gone up five times since last May, when it stood at 4.64%. The central bank's rate is based on a survey of conventional five-year rates available at the big banks.

The impacts are as follows, according to industry experts:

  • Canadians will pay more per month for their mortgage
  • The amount Canadians can qualify for has diminished
  • Will likely impact house prices by affecting supply and demand; although differently in different areas of the country 

Reduced Buying Power Generally

According to Mortgages of Canada founder and CEO Samantha Brookes in Mortgage Broker News, “Homebuyers’ buying power has been decreased even more, so those who are selling will have to bring their prices down to get a sale. The market is just correcting, so this is to be expected. Until the rate gets to where the government and banks feel the rates need to be - I truly believe it will be in the 5% or 5.5% range - rates will continue increasing.”

Ms Brookes says monolines have not raised their benchmarks, which is good news for brokers trying to find their clients some relief. She said, “The monolines haven’t moved their benchmark, so that’s good news for brokers because we can still qualify clients at 5.14%.”

She estimates that, with the latest hike, 10-15% of buyers are out of the market.

Impact Buying Power Lower on the East Coast and Less Expensive Markets

On the East Coast, however, the benchmark hike will have a nominal impact. Clinton Wilkins of Centum Home Lenders Ltd. Says, “I think it will impact about 5% of buyers, and those were the people who were barely scraping into the market already. With the people remaining in the market, they qualify for less, so they’ll buy something less expensive. Our real estate prices are lower, and overall, there are more people who are buying starter homes now than before because in Halifax there’s not a lot of inventory on the market.”

Rationale for the Stress Tests

"The idea behind [the test] is to make sure you can afford your mortgage at a time when interest rates are going up," Cynthia Holmes, an associate professor and chair of the real estate management department at the Ted Rogers School of Management at Ryerson University, told CBC Newsin an interview.

"They want to make sure you can afford your mortgage with a good solid rate in place, not that you can only afford it if rates are really, really low," Ms Holmes said.

Stress Tests Here for Only a Time?

For this reason, some believe that these stress tests will be rescinded in a few years when the correction is complete; that is, when rates stabilize at levels where monetary policy is less open.

“It may be a few years down the line that they get rid of stress test, but they can’t leave it in place,” said Ms Brookes. “If they go to 5.5%, even on the alternative side, it takes 7.5% to qualify. If it goes up to 6%, then it’s 8%. People won’t be able to afford their home.”