Stress test rate drops because mortgage interest rates keep dropping

Thanks to a reduction in some Big-Bank posted rates in recent days, Canada’s mortgage stress test rate will fall as early as next week.

Both RBC and BMO cut a number of their posted mortgage rates this week, which should cause the mortgage stress test to fall from 5.04% to 4.99%, according to RateSpy.com.

“It’ll mark the first time since January 2018 (when OSFI’s stress test began) that this benchmark rate has been under 5%,” the site noted. “And, if one more bank matches BMO’s and RBC’s 4.94%, it could drop another 5 basis points.”

Granted, the rate change will be negligible for most buyers trying to qualify for a mortgage. RateSpy calculated that a mortgage stress test of 4.99% would allow a household earning $100,000, with 5% down and no other debt obligations, to qualify for a mortgage about $2,000 more compared to today.

Mortgage Arrears to Rise

Mortgage arrears in Canada are expected to peak in the third quarter of 2021 at around 0.80%, according to the Bank of Canada’s recently released Financial System Review (FSR).

“The scenario’s peak arrears rate of around 0.8 percent comes in the second half of 2021, when payment deferrals have expired but not all households have had their incomes fully recover,” the BoC noted. “This peak is close to double the peak arrears rate in 2009.”

This scenario takes into consideration policy measures announced by the government to blunt the effect of the economic shutdown. Without these measures, the BoC estimates the mortgage arrears rate would have reached a peak of 2.10% by the end of 2020.

More from the BoC’s latest FSR:

• Debt Ratios Forecast to Rise: “The proportion of households with debt-service payments of more than 40% of their income, an indicator of household vulnerability, is likely to rise.”
• Households on the brink: “Many households have limited liquid assets. About 20% of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments.”
• The Takeaway: The Financial System is Resilient: Despite a “highly uncertain” economic outlook, the BoC remains optimistic about the country’s ability to weather this storm. “The six largest banks entered the COVID‑19 period with strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system,” the BoC noted. “The Canadian economy was also in a solid position before the onset of COVID‑19. With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences.”

Many Canadians Fear Being Locked Out of the Housing Dream

The dream of home ownership is vanishing for a large number of Canadians, according to a new survey.

Of those who don’t currently own a home, one in five (20%) say they believe they will never be able to purchase a home and will instead become “forever renters.”

This was most common among those born before 1946—known as the Silent Generation— at 94%, followed by Baby Boomers (61%), Gen Xers (41%) and millennials (18%).

Interestingly, Gen Zers (those aged 18 to 25) were most optimistic about their ability to own a home, with 81% saying they’ll own a home at some point in the future. Meanwhile, a full 10% of them say they already own a home.

Reports of “CERB” Mortgage Fraud

A well-known mortgage broker recently took to Twitter to share an exchange between his team and an individual who tried to take the system for a ride.

The broker tweeted: “Us: Reviewing your 3 months (of) bank statements, we see your payroll deposits are going in every 2 weeks but we see a CERB deposit from the Government of Canada. Why is that?” the broker wrote. “Him: Both my cousins said it was fine, they just applied and got it, so I applied and got it.”

Long story short, the bank confirmed with the broker that it was cancelling the client’s mortgage approval on the basis of mortgage fraud.

Let this be a lesson to anyone out there who thinks they can pull a quick one on the Canadian government and mortgage lenders alike. These stories rarely have a happy ending.