Stress testing not deterring would-be buyers

Mortgage stress testing isn't preventing many hopeful homeowners from entering the market.

To cool down a piping hot residential real estate market – where there are more people buying than properties available for purchase – the Government of Canada has implemented mortgage stress testing. This action puts an added onus on prospective buyers, who must submit to greater vetting protocols to ensure they have the ability to pay off a loan in full should interest rates spike.

Yet the added due diligence required of buyers won't prevent a substantial portion of them from seeing what's available in listings, according to the results of a newly released survey.

Over half of Canadians indicate they have no plans of stress-testing their mortgages even though the Bank of Canada continuing to raise interest rates is likely, based on a recent poll conducted by BMO Financial Group. Indeed, not only do economic experts forecast further rate increases, but also Canadians think an uptick is on tap, with 76 percent of respondents predicting as much.

Martin Nel, head of personal banking at the Montreal division of BMO Financial, noted how interest rates remained essentially unchanged for years. But with the economy in sounder shape, there have been several quarter-percent increases, the most recent happening in January. Current and prospective homeowners need to be aware of this reality.

"For the first time in years, interest rates are beginning to rise – making it increasingly important for Canadians looking to buy a home to stress-test their mortgage against a higher rate to ensure they can afford it over the long term," Nel advised. "We encourage homebuyers to familiarize themselves with the tools available to them and speak with a mortgage specialist who can help plan all aspects – both long term and short term – of what will likely be the biggest purchase of their life."

Home prices still elevated, but down from last year
Nel's advice is not an overstatement given the unabated pace at which home values are climbing, fueled by a seemingly unending source of people looking to upsize, downsize or purchase for the first time. According to the most recent estimates from the Canadian Real Estate Association, the average house in March sold for $491,000. That figure was down by more than 10 percent from the same period last year. CREA Chief Economist Gregory Klump attributed the dip, at least in part, to the more rigorous lending standards that officially went into effect on New Year's Day, prompting would-be buyers to wait it out or take action prior to Jan. 1.

Sal Guatieri, BMO Capital Markets senior economist, noted that given interest rates aren't forecast to rise exponentially, this expectation may explain why most borrowers don't feel it necessary stress test when they don't have to, like if they've already obtained a mortgage.

"But they should at least plan for a worse-case scenario that involves a material increase in borrowing costs," Guatieri cautioned.

3 in 4 people prefer fixed to variable-rate mortgages
Given a choice between fixed rate and variable, Canadians overwhelmingly prefer the former. Nearly 70 percent of respondents in the BMO Financial Group survey said fixed was their preference, while 14 percent lean in favor of variable.

As to what mortgage stress tests exactly involve, federal guidelines mandate financial institutions examine borrowers' financial capability by checking against the Bank of Canada's five-year benchmark rate or their contractual rate, whichever is higher, Global News noted. They must then add two percentage points to either rate to see if borrowers would still be able to afford monthly mortgage payments.

Meanwhile, with added construction activity among builders and reduced development costs, real estate experts are hopeful the market will achieve greater balance, much of which will depend on the rate at which demand speeds up or slows down.