Mortgage Stress Test: Influence At Rates and Loans

The International Monetary Fund, also known as the IMF, had some things to say about the current mortgage stress test. As of Tuesday, they warned law and policy makers all over Canada to keep the mortgage stress test rules where they are, and to not ease them lower. This is mostly due to the fact that overall household debt is still significantly high.

According to the Canadian Mortgage and Housing Corporation, otherwise known as the CMHC, mortgage loans are increasing at a much smaller rate throughout this quarter than prior times. However, it is important to note that the overall value of mortgages is certainly rising.

“While indebtedness of Canadian households remains elevated, growth in the volume of mortgage activity slowed in the last quarter of 2018, partly reflecting lower housing market activity…”, stated the CMHC.

“Despite high debt levels, delinquency rates remain low and the number of highly indebted and more vulnerable consumers has decreased…”

Also, according to the CMHC, the newly found national trends are currently mirror what just happened in large scale housing markets such as Vancouver and Toronto.

Once again, the CMHC states that since the housing price in Canada on average is still quite elevated, “This explains, in part, why the average balance of new loans remains higher than in the overall mortgage market…”

As time carries on, we’ll undoubtedly see a response from Canadian policy makers on whether or not they’ll modify the boundaries and rules regarding the mortgage stress test.

As of last week, Stephen Poloz of the bank of Canada pushed for lenders to start increasing long term mortgage terms. A notable response from HSBC showed that they’d started offering a fixed rate of 2.99% for a ten year period. This is unprecedented.

It’s important to note that if someone who has signed onto this ten year contract drops out should rates drop, they’ll face significant penalties. Interest of three months.

“That risk, and the small market-implied odds of meaningfully higher rates in five years, are largely why 5-year mortgages still have the edge over 10-year terms, for most people…” stated Rob McLister of RateSpy.com.

According to James Laird of Ratehub, “The 10 year fixed rate is an insurance policy, so if you’re really, really concerned about rates rising, and really want to take the risk out of your borrowing, it’s that type of consumer…”

In the past few months, if not longer, the Canadian government has been discussing the mortgage stress test, and how it may stimulate activity in the housing markets. Today the IMF, otherwise known as the International Monetary Fund chimed in, saying that the stress test would be “ill-advised”.

“This would be ill-advised, as household debt remains high and a gradual slowdown in the housing market is desirable to reduce vulnerabilities.”

Benjamin Tal, the deputy chief economist with CIBC, had various things to say about the stress test. For one, the stress test is most likely responsible for a near 8% drop is brand new loans via large scale lenders.

It will undoubtedly be interesting to see what the mortgage stress test has instore for Canadians in the near future. Stay tuned for more.