Canada’s mortgage stress tests are broken: economist

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Among the major new rules is a requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo such a test. By law, borrowers with a down payment of under 20 per cent for a home must purchase mortgage insurance.

Here’s how much house you’ll be able to buy with the new mortgage stress test. The new guidelines now require federally regulated financial institutions to vet applicants for uninsured mortgages by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89 per cent) or their contractual rate plus 2 percentage points.

Following criticism from industry, the Bank of Canada has lowered the rate used by mortgage stress tests to determine whether would-be homeowners can qualify for a mortgage. The central bank’s.

Income required to cover the costs of owning an average home with a 25% down payment and clear the mortgage stress test, thou sand $ Canadian households now need much higher income to qualify to buy a home Source: RPS, Royal LePage, Statistics Canada, Bank of Canada, RBC Economic Research

The Toronto and Vancouver housing markets are on the brink of a "severe downturn" that could hurt the country’s GDP and drag home prices down by up to 40 per cent, a Capital Economics economist..

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If you’re renewing your mortgage next year. Lenders don’t have to apply the stress test to clients renewing an existing mortgage. This means that if you fail the stress test, you’ll probably get stuck renewing with your current financial institution, without being able to shop around for a better rate.

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The estimates of potential future stress losses represent the amount of capital a Bank should have available to cover certain risks posed by changing economic conditions. There are two separate stress tests, one subjecting the entire Bank portfolio to market risk shocks, and one subjecting Bank held mortgage assets to credit risk shocks.

Similar research from Benjamin Tal, CIBC’s Deputy Chief Economist, estimated the stress test is responsible for an 8% decline in new mortgages started in 2018, translating into a $15 billion drop in lending activity.

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