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Mortgage 101 – increased stress test rates | June 2021 Part 1

In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on News 95.7, the guys talk about the increased stress test rates, how the stress test protects borrowers and the industry, plus possible solutions to cool the housing demand.

Mortgage 101 with Clinton Wilkins & Todd Veinotte – June 2021 – Part 1

Don’t feel like watching the video? Check out the transcript below.


“Housing across the country has been on fire”

Todd Veinotte: [00:03:03.95] So through all this pandemic, again, the market has remained extremely strong. And not just in Nova Scotia. Housing across the country has been on fire. Like this is one of the big business stories of the year.

Clinton Wilkins: [00:03:18.29] One hundred per cent. And, you know, that was exacerbated by people, you know, really re-evaluating how they were living. You know, I’ve never been home as much as I have been in the last 16 months or so. And, you know, the type of homes that people need, I think are changing. People are working from home and some people are never going back to the office.

So, you know, I think people had some more time to think about what was their long-term plan in terms of housing. And you know what? It’s certainly created a lot of activity in the market, but also a lot of demand. And part of the challenge in Nova Scotia is there’s a limited amount of supply and that’s really driven up the prices. Now, the one thing really that I can speak to is, you know, in Halifax, there is going to be more supply coming on board.

Possible solutions to cool the housing demand

But I think one of the issues that the federal government needs to work with the province and the province needs to work with the municipality is to cut some of the red tape to get more shovels in the ground. Let’s get some of these building lots going. Let’s work on some HST credits from different levels of government to really help. And, you know, I think the housing stock is an issue. It’s not just an issue here in Halifax. It’s an issue across the country in more urban areas. And, you know, the solution is not going to be overnight.

Todd Veinotte: [00:04:40.13] Yeah, I was going to say you don’t turn that around in a day, right?

Clinton Wilkins: [00:04:43.37] No, it doesn’t happen in a day. But I think the decisions that are made today and in the coming days, weeks, months, even of this year are going to impact what’s going to happen here in three and four and five years down the road. And if we don’t, you know, start solving some of these policy issues and, you know, really start solving some of the housing challenges, I think it’s going to, you know, just further inflate maybe the market.

And some people are asking me: “Clinton, do you think the prices are going to go back to more of a normal state?” I think this is the new normal in terms of price. There may be slightly less demand and we may go to more of a balanced market at some point once there is more supply.

Increased lending capacity — where is the money coming from?

Todd Veinotte: [00:05:28.64] So the need for mortgages and the lending capacity has gone up exponentially. We know that. We’re talking about that. Where’s the money come from, where’s the capital come from? Have lenders been sitting on this money, are they borrowing money to then lend money? How does this all work?

Clinton Wilkins: [00:05:47.51] They all borrow money to lend money. They all do. And at one time, used to have to have a penny for every dollar you lent out. Now the lenders have to have more capital on reserve based on how much they’re lending. And you know what? The federal government is really interested in that. And they’re really interested in protecting the lenders and they’re really interested in making sure that consumers can continue to pay their mortgages.

So, you know, in the news the last several weeks and months, we’re talking about changes to the stress test and that went into effect June 1. And really, the moral of the story of that stress test was they basically are making it more challenging for new buyers to enter the market and existing homeowners to maybe borrow more money.

Increased stress test rates

So with the stress test prior to June 1, we were qualifying consumers at a five year posted rate for the Bank of Canada at 4.79. They’ve decoupled that. And now the stress test has increased to 5.25. So basically, if you’re looking to buy a home, now you can qualify for about five per cent less than what you could have qualified for in May.

Todd Veinotte: [00:07:09.73] Okay, so to simplify this thing, because people say, what do you mean, 5.25 per cent? I’m getting my mortgage at 1.18 Or whatever. You are qualified, though, in case that goes up in that five year span, if interest rates skyrocket, or a renewal, if they jump to 5.25, based on everything that you bring in, you’ve got to be able to cover that 5.25.

Clinton Wilkins: [00:07:32.72] Exactly. And that’s what we’re looking at everyday. Now, the only caveat, the only people who are maybe getting an exception of this is if you’ve made a purchase agreement prior to the 1st of June, then you can qualify on the old rules. But those are the only people that can still qualify. And those applications must be received by June 30.

Todd Veinotte: [00:07:53.67] And that’s not a pre-approval either.

Clinton Wilkins: [00:07:55.13] That is a real live deal, a purchase agreement that was executed prior to the 1st of June. So really, we’re qualifying everyone now at 5.25, everyone who had an existing pre-approval, we’ve sent them an email to say, you know, guess what? You can qualify for less now.

Stress test pricing people out of the housing market

And, you know, it’s going to take some buyers out of this market because, you know, those buyers maybe were at the top of their affordability and what they can qualify for before. And now really, they can qualify for five per cent less.

Todd Veinotte: [00:08:26.96] What per cent would you say is no longer going to be in the market as a result of this?

Clinton Wilkins: [00:08:31.85] I think it’s a fringe per cent.

Todd Veinotte: [00:08:33.80] Less than two per cent, something like that.

Clinton Wilkins: [00:08:35.84] Maybe. Maybe it’s five per cent. I don’t know. I don’t have those stats. And as the prices increase, more and more people are going to be priced out of the market. I think that’s just reality.

Todd Veinotte: [00:08:49.29] Okay, but it’s protecting the industry as well and protecting people’s long term financial position also. There’s a reason for it.

The stress test protects borrowers and the industry

Clinton Wilkins: [00:08:59.81] That’s why the federal government OSFI and the minister of finance came out and said they’re aligning these stress tests. Originally, when they first had rumblings that they were going to make the changes, it was only going to be for conventional mortgages. So for mortgages for people who are buying a home with putting down 20 per cent or more. Those were the rules that were going to be or if you were doing a refinance.

But when the rules officially came out, OSFI said what they were doing with the rule changes. The minister of finance came out and said she was going to support an alignment of both the OSFI rules for the conventional mortgages and the high ratio insured mortgages. So that would be from the Canadian Mortgage and Housing Corporation, Sagen, and Canada Guarantee, there was going to be an alignment. So everyone’s now qualifying at the same higher stress test rate.

The Canadian dream of homeownership

Todd Veinotte: [00:09:54.54] Okay, I want to talk to you in the next segment, I want to talk to you after the break about homeownership. You talk about the Canadian dream and it is the Canadian dream. But for many, that dream has been shattered because of this market. This is a story that we’re seeing played out right across the country. So that’s something that I want to talk to you about. And because that’s a real issue, right?

Clinton Wilkins: [00:10:15.78] Yeah, it is. It is for sure. And, you know, I think new buyers and first-time home buyers, those are the people that I’m worried about. I’m not worried about myself. I’m not worried about people who already own homes. I’m worried for the people that are just getting into the market for the first time.

Todd Veinotte: [00:10:30.99] Okay, so we’re going to get to that. It’s Mortgage 101 Your Guide to Homeownership with Clinton Wilkins and myself. Todd Veinotte, we will be back.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.

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