Stressed About The Stress Test?

    (December 06, 2017 )

    - By Nishka Riley

    As of January 1st, 2018 the mortgage qualifying rules are about to change dramatically.

    The good news is only two groups of Canadians will be impacted:
    1. Those who own a home
    2. Those who want to own a home

    Obviously, I’m being incredibly facetious with the matter, but I’m sure you get my point – this time the government is targeting everyone.  To help you understand how you could be impacted, we’ve listed some of the questions we are fielding.

    What is the Stress Test
    Starting January 1st, 2018, if you are accessing the equity in your home through a refinance, wanting to transfer to another institution or if you are buying a home with a down payment of 20% or more, you will have to qualify at the GREATER of 2% above the lender negotiated rate (the contract rate) OR the 5 year posted bank rate.  Note that your mortgage payment will be based on the contract rate – so you can breathe easy – your mortgage payments aren’t about to go shooting up!

    Why Now?
    To explain it a very simplistic way; our economy is out of sync.   We are experiencing slow economic growth, yet housing prices continue to increase at a rapid rate.  Normally the two would be moving in the same direction at close to the same growth rate, and to slow things down the Bank of Canada would just raise the prime rate.  However, taking that approach to our current economic situation would be catastrophic. The solution? Change government policy by making it harder for people to borrow mortgage money.  And voilà the Stress Test is born.

    Who will be impacted?
    Since you’ll have to qualify at a rate that is 2% higher, your borrowing capacity is going to be reduced by about 20%. This will affect anyone who is purchasing a property, taking equity out of their home or has a mortgage maturing and would like to shop for a lower rate.

    Here are some real-life examples we are currently working with:
    • A family wanting to take equity out of their home with a household pre-tax income of $150,000
      • Amount can borrow today: $1,050,000
      • Amount can borrow Jan 1st: $825,000
      • Difference $225,000
    • A First Time Home Buyer who has saved the 20% down payment with a pre-tax income of $100,000
      • Purchase price today: $850,000
      • Purchase price Jan 1st: $670,000
      • Difference $180,000
    • A family that is wanting to transfer their mortgage to another institution on maturity and maintain their target payoff date.
      • Current mortgage Balance: $900,000
      • Current amortization (payoff date) : 15 years
      • Family Income: $200,000
      • Can they switch their mortgage?
        • As of today: YES
        • As of Jan 1st:  NO
    Who won’t be impacted?
    • Buyers with less than 20% down payment
      • They already have a more stringent stress test applied to their applications.
    • People who enter into a contract to buy a property in 2017 that completes in 2018.
      • The caveat here is that provided the bank doesn’t need to requalify the borrower if the closing date is past 120 days.
    • Pre-Sale Buyers
      • Since the rules will be based off contract date, this group will be fine.  However, the names on the contract cannot change. Buying a pre-sale contract on assignment will be subject to the new rules if done in 2018.
    • Refinances approved before January 1st, 2018
      • We are still waiting for clear communication from all the lenders, but some have communicated to us that providing the application is approved in 2017, they will allow up to 120 days from the approval date to complete the transaction.
    • Pre-approvals
      • This is a tricky one. Some banks are reading into the rules and are still deciding if they will honour pre-approvals done in 2017 that turn into live deals in 2018.  We are anticipating that all pre-approvals will have to be requalified under the new rules as of January 1st.
    • If your mortgage is maturing and you’re not making any changes
      • providing you are in good standing with your lender you are allowed to renew automatically.
    • Credit Unions 
      • Since they are regulated provincially, they aren’t subject to federal rules.
    • Non Federally Regulated Lenders
      • These are the lenders that work exclusively through the broker market.  Since they are not federally regulated, they are not obligated to follow the new rules.  It will be interesting to see what they will do.
    • Private Lenders
      • This group is also provincially regulated, so they aren’t subject to federal rules.
    What should I be doing?
    Take an inventory of your both your financial and life goals.

    What does life look like 2 to 3 years from now? What changes do you foresee that might require a little financial wiggle room to make it happen, i.e. having a baby, changing a job, becoming self-employed, taking a sabbatical?  A little planning now can make sure all those dreams stay intact and can be accomplished without stress.

    It’s a perfect time to revisit what happened in 2017 and start planning 2018 now that the year is coming to a close.   For the past three years, we have been using an incredible program called 5 Days to Your Best Year Ever by Michael Hyatt.  It will be opening up for registration again on November 29th.  If you would like to be added to the list during its limited release period, just click here and we’ll make sure to get you in.

    For our existing clients, we are recommending that if they would like to take equity out of their home or buy another property, they should talk to us now.  Even if you are maturing 6 months from now, some lenders will allow us to refinance you early without a penalty.

    Bottom line, working with a mortgage broker is going to more important than ever due to this simple bit of math: Different Lenders + Different Regulations = Better Solutions.  Having access to multiple lenders will be critical to achieving your financing goals for the next 2 to 3 years.

    Will Real Estate Crash?
    Nobody can predict the future, but you can look at the variables that impact it, draw from your experiences and make an educated guess.   So here is why we think prices might soften, but overall the market should hold steady.
    • Supply – the number of homes available to buy
      • Regardless of the inventory levels of homes to buy, we live in a landlocked part of the province.  Overbuilding is not an issue like it is in Ontario, where the supply of land seems to be unlimited and to connect these newly built communities requires no bridges.
    • Demand – if you list it who will come?
      • There are three main sources of new buyers who are entering the Vancouver market 1. Millennials 2. Interprovincial migration 3. Foreign buyers ( ie. Tech sector employees – Thanks to President Trump ).  This doesn’t include move up buyers who have seen a significant increase in their condo.
    • Condos and Townhomes
      • This market should actually thrive under the new rules.  People need a place to live, and will rarely sacrifice location (location, location) over home size. This means people will be forced down into the townhome and condo market which will send prices up.
    • Interest rates will not significantly rise
      • Interest rates are driven by inflation, and currently inflation is forecasted to stay below the Bank of Canada’s target rate for the next 18 months.  Also, higher interest rates will lead to a stronger Loonie, which will hurt our export economy, so there is a vested “interest” to keep rates low.
    • Business spending is starting to take hold
      • Since many CEOs were shell-shocked by the liquidity crisis of 2009, a lot of business have been sitting on mountains of cash.  Now that the economy is starting to show signs of slow, but consistent growth, businesses are starting to re-invest in their employees and equipment.  This is an important piece of the puzzle that needs to fall into place because the consumer has been doing all the heavy lifting when it comes to supporting the economy over the past 5 years.  It will also lead to lower unemployment.
    • Wage Growth
      • The Canadian economy is nearing what is called “full production capacity” which means that businesses are going to have to hire more employees to keep up the level of work or spend more money on automation. When this happens it usually leads to increased wages since companies have to pay employees more to retain them, or to attract new talent.
    • This is a rule change – not an interest rate change
      • Though it will be tougher to qualify for a mortgage, the cost of borrowing is not increasing.  At the end of the day, people will still be bringing home the same level of income.  In fact, this could put more money into people’s pockets since they will not be able to stretch themselves as much financially with the new rules.  If you are looking for a job, it might be time to get a sales position at a boat or a car dealer!
    All these variables add up to provide support for housing prices.  Having said that, will housing prices come down in the short term? Possibly, but this is more a of blip on the radar due to realtors pricing in the future value of a home into the current list price.  Once this future pricing has worked it’s way out of the system home values should stabilize.

    Our final words of wisdom:  Your home is not a stock.  Its value should not be considered as if it could be traded on a daily basis.  Real estate is a long-term investment.  As Mark Twain said …Buy Land, They Aren’t Making Any more Of It. Nowhere else in the world could this be truer than in Vancouver.