Photo: James Bombales
Economic researcher Will Dunning has a problem with the mortgage stress test the federal government imposed about a year ago.
Actually, he has four.
Last January, the Canadian government expanded its standard stress testing, which requires borrowers to qualify at a higher mortgage rate than they are signing on for. Before that, it only applied to insured mortgages. Mortgage insurance is needed if a homebuyer can’t muster a downpayment of 20 percent or more, so previously, those who could managed to sidestep stress testing.
Dunning, who describes himself online as an “iconoclastic economist” outlines what he says are four significantly harmful shortcomings of the stress testing.
“The tests fail to consider the income growth that will occur by the time mortgages are renewed” — that’s Dunning’s first issue, as outlined in his latest study.
The point of the stress test is to makes sure borrowers are up to the task of making higher mortgage payments upon renewal, typically five years from signing on. So federally regulated lenders now need to make sure all borrowers can afford to pay the higher of the Bank of Canada’s qualifying rate or the contract rate plus two percentage points.
Problem is, this method ignores rising incomes. Borrowers’ ability to make interest payments in five years is based on incomes today. Dunning notes that over the past five years, incomes have grown a cumulative 11.6 percent on average.
“They have negative consequences for the broader economy,” Dunning says, summing up his second issue.
BMO suggests that the pace of residential construction has been slowing down as a the mortgage stress test has taken a bite out of homebuying activity. In fact, Canadian home sales were down 4 percent in January on a year-over-year basis, according to the Canadian Real Estate Association, which chalked up at least some of the decline to the stress tests.
Dunning estimates that Canada will lose 90,000 to 100,000 jobs when the labour market fully adjusts to the slowdown in starts.
“They prevent Canadians from pursuing their long-term best interests,” says Dunning as his third strike against the current test. After all, a mortgage is really “forced savings,” he says. Sure, in the short term a roughly 60-percent portion of mortgage payments are going towards interest, and initially renting is usually the cheaper option.
But that changes over time. “Rents increase; for home ownership, the largest element of costs (the mortgage payment) is fixed (usually for the first five years). The total monthly cost of renting will rise more quickly than the cost of owning.”
Back to that slowdown in housing construction. Job losses aren’t the only negative consequence of less home construction taking place. “Suppressed production of new housing will worsen the shortages that have developed,” Dunning warns.
Dunning says construction needs to speed up, not slow down, to meet demand. The country’s population has been increasing at a rate of 1.25 percent annually for the past three years, above the long-run average of 1.1 percent.
“Long-term, the stress tests will add to the pressures that Canadians are already experiencing in the housing market.”
Source: Livabl.com – Josh Sherman
The more experience you have with buying real estate, the more you’ll learn about the complicated process. Between the confusing terminology and the logistics of buying a house, it’s all-too-easy to make the wrong move or wind up in an unwise investment. If you’re a first-time home buyer, skip the buyer’s remorse by learning about some of the most common pitfalls and how to avoid them. To find out what not to do, we reached out to Tracie Rigione and Vicki Ihlefeldthis link opens in a new tab, Vice Presidents of Sales at Al Filippone Associates/William Raveis Real Estate in Fairfield, Connecticut, to get their best advice.
Photo: James Bombales
Livabl is here to help you understand the housing market. With this comprehensive explainer, our aim is to give you a 360-view of this important issue that has been affecting the market.
For prospective homebuyers, there are several financial hoops to jump through on the way to property ownership: growing a healthy downpayment, securing a preapproval, and finding a home that fits within budget, to name a few. Yet, even with years of financial planning, the dream of homeownership can quickly come crashing down if one cannot jump through the hoop that trips up first-time and repeat buyers alike: the mortgage stress test.
In January 2018, the Office of the Superintendent of Financial Institutions, a federal watchdog and the sole regulator of Canadian banks, implemented the Residential Mortgage Underwriting Practices and Procedures guideline — otherwise known as B-20. Under B-20, all new and renewing homebuyers who opt for a regulated mortgage lender are subject to a mortgage stress test, which evaluates the borrower’s ability to afford residential mortgage payments against higher interest rates. OSFI says that this policy protects Canadian homeowners from excessive debt and unaffordable mortgage payments.
“The stress test, which is one component of our B-20 guideline, is a safety buffer that ensures a borrower does not stretch their borrowing capacity to its maximum, leaving no room to absorb unforeseen events,” says OSFI in a statement to Livabl. “Borrowers across Canada face different risks that could impair their ability to pay their mortgage: changes to income, changes to expenses, changes to interest rates.”
However, the mortgage stress test does not affect everyone equally. In Canada’s most expensive markets, such as Toronto, where the average price of a home is expected to surpass $820,000 in 2019, buyers have been disqualified for mortgages by the test based on high down payment requirements. Meanwhile, in cheaper real estate markets, such as Regina, the RBC reports real estate prices fell in the third quarter of 2018. Yet, as the job market remains stagnant in some cities, meeting the income standards to pass the stress test creates a provincial disadvantage.
“The one downside is that it’s made it harder for some buyers to get into the market because what they can spend on a home now is a lot lower than what it was a year or two ago before the stress test,” says John Pasalis, Founder and President of Toronto-based brokerage Realosophy.
In other cases, desperate buyers are opting to avoid the stress test altogether by choosing to work with private lenders, who are not federally regulated by OSFI and offer much higher interest rates. Some have questioned the financial stability of the market with this increased presence of higher interest rate lenders.
“People are going to private lenders, and that brings on other risks,” says mortgage broker Elan Weintraub. “It brings on economic risks because if people are paying $4,000 a month for a private lender mortgage payment, they can’t go to restaurants, they can’t buy clothes, they can’t spend money on other things.”
If you’re a first-time buyer, don’t stress about the stress test. We turned to mortgage and real estate professionals to help answer key questions about the test.
All Canadian buyers are required to take the mortgage stress test, but how you are tested depends on the size of your down payment.
If you have a downpayment of less than 20 percent of the home purchase price, your mortgage is automatically insured. With the added insurance premiums, your payment rates are increased up to 4 percent higher. Insured mortgages will be tested between the interest rate offered by the regulated mortgage lender — typically, one of the top five banks of Canada — against the Bank of Canada’s conventional five-year mortgage rate (5.34 percent as of February 2019).
Those with uninsured mortgages and down payments greater than 20 percent, will be have their current rate tested, plus a two percent point increase, against the five-year bank rate. To pass the stress test, the calculated interest rate must meet the Bank of Canada’s qualifying rate or the contracted rate plus two percentage points, whichever is higher. For example, if your lender offers an interest rate of 2.99 percent for your uninsured mortgage, plus two percentage points, your calculated interest rate would need to meet the Bank of Canada’s minimum qualifying rate of 5.34 percent, since it is the greater of the two.
The mortgage stress test will consider elements such as your gross income, debt and expenses. A mortgage qualifier calculator can give you an idea how much income and down payment amount you’ll need to pass, but Pasalis recommends speaking with a mortgage broker before you begin the process.
“In the past, you could just go on some mortgage calculator and try to estimate yourself,” he says. “But with stress tests and all of these new mortgage rules, you want to go to a mortgage broker for them to tell you, in theory, what you qualify for, because that kind of really sets your expectation of what you can afford to spend on a home.”
If you wish to secure a fixed-rate mortgage, the stress test may dash those hopes.
Fixed-rate mortgages are typically priced higher than variable-rate mortgages, as variable-rate payments fluctuate with interest rates and a higher proportion of a mortgage payment goes to principal. These higher fixed-rates can limit your options when applied to the stress test. As Weintraub describes, borrowers looking at a fixed-rate of 3.69 percent with an uninsured mortgage, plus two percentage points, wouldn’t qualify against the Bank of Canada’s rate.
“There are some clients who are so tight they can’t have a 5.69 [percent] stress test, they need a 5.34 [percent] stress test, so they have to get the variable rate even if they want fixed,” says Weintraub. “If you make a lot of money you can have both options, but if you have a very tight file, you might only have the option of variable.”
A common criticism of the stress test is its tendency to trap borrowers with their current lenders. Buyers who purchased their home prior to the stress test are still required to participate. For those who won’t pass, it means staying with the same mortgage lender to avoid disqualification.
“Imagine that you want to renew your mortgage but you technically don’t qualify under the new stress test. You’re technically handcuffed with that same lender,” says Pasalis. “They can charge you eight percent interest and you can’t do anything about it.”
While OSFI ensures that the stress test, “contributes to public confidence in the Canadian financial system,” Weintraub questions whether this element of the policy benefits the market overall.
“If the bank knows the borrower cannot leave, how competitive are they going to be with their rates?” he says. “Some of my lowest interest rates are when their mortgage is expiring and I can move them to a new lender. But if they don’t pass the stress test, they’re basically forced to stay with their current lender, which doesn’t make sense.”
If you’re a nervous test taker and want to sit out, then you do have the choice to not take the stress test — but at a cost.
The mortgage stress test does not apply to unregulated mortgage finances companies, called MFCs. While provincially regulated, these lenders operate in the private market, which makes loan approvals easier to obtain, but at higher rates. Weintraub suggests that an MFC lender should be reserved for short-term loan options.
“If you’re a first time buyer dying to buy a place and you go to a private lender, I don’t necessarily know if that’s the right solution,” says Weintraub. “I think private lenders are meant for very short term solutions, to help someone in a very specific situation, and then to get out of that situation ideally in 12 months or less.”
Pasalis says that MFCs tend to take on riskier borrowers, so higher interest rates compensate for that liability. But these higher payments, Weintraub says, can push new buyers into being house poor.
“It’s meant to be a stop gap, it’s not meant to be a long-term, sustainable way to borrow money, because it’s very expensive,” he says.
Flunking the stress test is not the end — you can always retry later with a higher down payment or increased income. Weintraub says that the Bank of Mom and Dad could be available for some buyers looking for a mortgage co-signer or a boost in down payment funds. However, he recommends evaluating whether homeownership is truly worth it if this is the case.
“I would say that buying is not for everyone and sometimes we get into this whole, ‘I need to buy, I need to buy,’ mentality,” says Weintraub. “But there are certain situations where renting is a great option.”
While there has been increasing pressure for OSFI to provide policy relief for those in expensive markets, they remain firm on preventing “relaxed mortgage underwriting standards.” Pasalis says that there is always future potential for first-time buyer relief, but overall, exceptions to a national policy are unlikely to be made for individual market conditions.
“They can’t craft out different policies for Vancouver and Toronto and by municipalities,” he says. “I think the market will adjust to it.”
Source: Livabl.com – Michelle McNally
According to a poll by the Bank of Montreal, 68 percent of Canadian couples surveyed cited fighting over money as a top reason for divorce, ahead of infidelity. Buying a home together only raises the stakes — bank accounts are merged, couples are collectively preparing for the biggest purchase of their lives and are budgeting together to chip away at a downpayment.
Octavia Ramirez is the founder of Paper & Coin — a financial coaching company that helps Millennials reach their personal finance goals. “Money can be a huge stressor in relationships. So why not get ahead of the problem?” she says.
Photo: Paper and Coin
The finance pro is uniquely qualified to help couples. Since getting married, Ramirez has never once fought about money with her husband. “Obviously, I enjoy finances but it’s taken years of practice to get here,” she tells Livabl.
It all comes down to communication and understanding your partner’s unique worldview — especially when it comes to money. Dr. Katelyn Gomes (Ph.D., C.Psych), a clinical psychologist with CBT Associates, echoes this: “We each have unique personal histories that define our values, rules, dislikes and assumptions for living in and viewing the world — including how we spend money, save money, even what’s important in the home you purchase.”
Octavia Ramirez and Dr. Katelyn Gomes spill their tips for communicating about finances and, in turn, making your partnership even stronger.
“I often see couples not working together as a team by splitting their expenses. This divides your efforts and can interfere with what you’re trying to accomplish,” Ramirez explains.
When it comes to buying a home, Ramirez makes a case for joining your bank accounts, “When my husband and I get paid, it all goes into the same checking account and we move the money accordingly. We don’t treat it as my money, your money. Consider that both of your incomes together are the grand total.”
When couples put their savings into separate accounts, they also diminish their returns. “Splitting your accounts is a democratic way of doing things, but you won’t get as much bang for your buck that way,” she says.
Ultimately, if you’re in a serious committed relationship, be in a serious committed relationship. “If you divide things based on your separate incomes, it gives the person who makes more a leg-up versus feeling like you’re equally respected in the relationship,” says Ramirez.
Ultimately, you will both be living in the house together. If one person makes considerably less, going 50/50 can potentially lead to selling yourself short — and building resentment long-term.
Photo: Paper and Coin
Ramirez often hears her clients explain that they have budgets — in their head. “It’s important to have a shared document that communicates your budget and spending at a glance.”
Before putting numbers into a Google spreadsheet, agree on your short-term and long-term financial goals with your partner. Working towards homeownership? Start by determining the cost of the house you want to buy, then work backwards to see how much you will need to save each year to make it happen.
“Once you know how much you’ll have to save in the year ahead, go back month-by-month and see what areas of your budget can be cut or if you can increase your income to reach that goal,” explains Ramirez.
Even if it means passing on your yearly vacation and doing a staycation, instead.
Octavia and Will Ramirez. Photo: Paper and Coin
Once you’ve set your budget and are tracking your expenses and spending, set monthly or bi-monthly meetings to stay on track.
“Getting a downpayment together is a huge accomplishment. It’s a long-term process and there are occasionally going to be slip-ups in your savings efforts. It’s important to come back together regularly to remind yourself of your ‘why’. Maybe you didn’t reach your goal one month. Don’t dwell on it for too long, and instead decide together to get back on the saddle,” says Ramirez.
Dr. Katelyn Gomes explains, “We have this tendency to incorporate comments from our partners using faulty or unhelpful interpretations. These are known as cognitive distortion and it includes things like mindreading, jumping to conclusions, catastrophizing or thinking of the worst-case scenario. When we think our partners opinion, wants or needs don’t align with our lens it can lead to difficulties in communication, clashes or arguments.”
When you keep the lines of communication open over your spending habits, it creates an opportunity to have the necessary dialogue to avoid miscommunications or jumping to conclusions.
“Whether it’s contentious or not, just showing up to have that conversation is really important to keep couples on the same page,” explains Ramirez.
Photo: Paper and Coin
To avoid major money stress down the line, Ramirez recommends having an emergency fund in place: “Before you buy a house, prioritize saving three to six months of expenses in advance. If you break up or someone loses a job, you won’t risk going into extreme debt while you figure out your next move.”
If you’re the one to handle the finances, Ramirez recommends letting your partner in on exactly what’s going on — whether it’s your insurance policy, the status of the car payments, how much interest you’re paying on the mortgage, or how much credit card debt each person has brought into the relationship.
“Because I enjoy finances, there’s a temptation to not keep my husband in the loop,” says Ramirez. “But even when I handle everything, I always debrief him after. He knows the passwords for the bank accounts and where things go, so he can take over at any point. Having everything on the table encourages you to trust each other.”
Source: Livabl.com – Jenny Morris
The renting versus buying dilemma is one my friends have started to face since they’ve begun leaving Manhattan and escaping to the suburbs (I’m still not there yet, but when I think about how much money I “throw away” each year on rent, it’s actually cringe-worthy). But, maybe it’s true when they say the grass is always greener. Buying doesn’t come without its own set of problems, considering both sets of my friends who recently purchased homes faced movers damaging their patio, gas leaks, and even a broken washing machine within the first week. (They’ve confided in me that their bank accounts are still recovering.)
Since we’re no experts on the topics, we decided to tap Scott McGillivray, a real estate/renovation expert and TV host, to get his professional take. “Neither renting or buying is intrinsically right or wrong,” he says. “It basically comes down to your goals and your lifestyle.” That being said, he encourages getting into the real estate market once you feel financially prepared to do so. And what if you’re worried about going all in? McGillivray suggests trying a practice mortgage in which for one year while you’re renting, you put aside the amount you’d have to pay as a homeowner (mortgage, property tax, potential repairs). This gives you a realistic idea of how your lifestyle and budget will be affected if you buy.
“If you can manage, go for it,” the expert says. “And the bonus is that at the end you’ll have some extra cash for a down payment.” Since renting versus buying is no small debate, we asked McGillivray to break down all the pros and cons for each. Keep reading to get the full scoop.
Flexibility to Move: “You’re not tied down with a mortgage and can move as often as you want.” Not having to commit to a neighborhood (or region) means you can try things out until you find the right fit. Or, if something happens in the neighborhood you’re not thrilled with, it’s easy to just move on.
Maintenance/Repairs Are Included: Oven breaks or there’s a leak? Call the landlord and they’re required to make the fix for you, free of charge. “You won’t need an emergency repair fund.”
Possibility for Better Location: If you’re looking to live in a certain neighborhood but can’t afford to buy there, renting can be more affordable. And if you have kids, this can mean a better school system, transportation, and more.
Extra Money to Invest: Depending on the rental market and where you live, you may have extra money to invest outside of your humble abode. “For many homeowners, there isn’t a lot of extra money left over.”
No Equity Built: “The money you pay each month will never be seen by you again.” Even though you’re spending money, you still have no ownership over your spot.
Rent Can Fluctuate: “With mortgages, you can sometimes refinance to make things more manageable, but not so with rent.” Anyone who rents understands that it’s rare for your rental rate not to increase every year.
Limited Ability to Decorate: Many rental buildings are strict, meaning you can’t even paint the walls a different color without approval (some buildings don’t even let you put a doormat outside your door for sake of uniformity). When you buy, you’ll have free rein to decorate and design everything from pendant lights to paint colors to carpeting or wood paneling.
No Return on Investment: “When you own a home, you can make value-adding improvements that will pay off when you sell.” That’s not the case for rentals, which is why you should be careful about spending too much on things like blinds and other custom pieces you won’t be able to take with you when you move out.
Landlord Issues Exist: “If you have to rely on someone who’s irresponsible, it can be a nightmare.” And while you can expect repairs to be made, it’s often not as quick of a turnaround when you’re not paying. (Pro tip: Try to rent from a reputable management company and ask friends and family for referrals.)
“If you’re in a temporary position or planning on moving in the short term, or if you have to take on unrealistic interest rates in order to buy, renting can be the smarter option.”
Equity is Built: When you buy a house or condo, you immediately start to build equity. This is different from renting in that you never see that money again once it’s paid out to the landlord.
Renovation Opportunities: “If there’s something you don’t like, you can simply change it—although you can be somewhat limited in apartments and condos.” Still, your ability to customize and personalize your home is greater when you own it.
Chance to Increase Value: Now when you make improvements and changes, you are actually adding to the value of your home and investment. “This means more money when you sell, and/or the opportunity to refinance and pull money out of the home for other reasons.”
Ability to Be the Boss: “With your own home you can pretty much do what you want.” Want to have pets or build a fence around your yard? Rentals require that you follow certain rules that can limit life choices; buying does not.
Tax Credits Exist: Ask your accountant about available tax credits that can help offset some of the costs when you buy. Although they vary and you may not qualify for all, you may get a tax break.
Long-Term Financial Commitment: You’ll have to be patient to see your return. “While you will build equity over time, it will take many years to see the financial benefit.”
Commitment to Location: “You can change pretty much everything about a house but its location.” If you don’t like your neighbors or a noisy bar or restaurant opens next door, you can’t just move (without a significant expense).
Large Down Payment: Remember you’ll need to put down a significant down payment (20% without paying a penalty). This can be a challenge for many people starting out.
Costly Maintenance and Repairs: Repairs are not free when you own and there’s no landlord to send someone to fix a problem. You’ll need to create an emergency fund for when the oven breaks or there’s a leak in the roof (or something similar).
According to McGillivray, “If you do it right, it can be the best investment you ever make. And if you’re looking for long-term financial gains or stability, this is typically the way to go.”
Now that you’ve learned all about renting versus buying, you’ll be able to make the decision that feels best for you.
Source: MyDomaine.com – by MICHELLE GUERRERE