The mortgage stress test isn’t getting any easier — but

Many people want to buy a home, but they can’t pass the insured mortgage stress test and/or make the minimum 20% down payment on an uninsured mortgage.Sean Kilpatrick/The Canadian Press

At this time last year, few could have imagined mortgage Interest rates would soar 400 basis points in just 10 months. But our banking regulator knows it’s possible, which is part of the reason why it’s forcing mortgage buyers to prove they can afford rates that are at least 200 basis points above actual rates.

(A basis point is one hundredth of a percent.)

This policy has saved a considerable number of homeowners from financial distress. As a result, the Office of the Superintendent of Financial Institutions decided on Thursday not to repair the undamaged parts. It left the mortgage stress test as it is – ensuring that borrowers can pay the higher of 5.25% or the effective rate plus 200 basis points.

Some in the housing and mortgage sector argue that high interest rate has peaked, so OSFI should relax its stress tests to prevent a housing collapse.

But the banking regulator has not wavered. It said last week that it was not in the rate forecasting business, and rightly so.As the Bank of Canada proved with its famous 2020 statement – “We will keep our policy rate at the effective lower bound…until sometime in 2023” – When it comes to long-term rate forecasts, the best informed experts are in the dark.

But if you’re hoping for a simpler stress test, there’s hope. The silver lining of recessions is that they lower bond yields. This in turn drives down fixed rates – and ultimately prime rates.

Once this happens, stress testing becomes much easier. The lowest published national uninsured mortgage rate of 5.24% will be under a stress test of 7.24%. If the current floor rate falls by at least 199 basis points – to 3.25% – then the stress test will be conducted at the minimum qualifying rate of 5.25%.

Whether this easing happens after 3 months, 12 months or 24 months is anyone’s guess. But if inflation subsides in the first half of 2023, as economists predict, the stress test will loosen sooner or later.

A 200 basis point drop in interest rates would mean the housing bulls reunited again. Every 100 basis point reduction in the stress test increases mortgage purchasing power by about 9%.

This means homebuyers can increase their purchasing power by up to 18% when interest rates return below average.

The tug-of-war between interest rates on the one hand and home values ​​on the other will tip in favor of homeowners. However, the affordability of first home buyers will deteriorate again, an old challenge they have faced for years. Except this time, most people will have more income to qualify for a mortgage thanks to inflation-driven wage growth.

Here’s exactly why many first-time homebuyers may jump at the chance to buy this spring — and why home prices may find a bottom in the near future.

A way to get an uninsured mortgage with a 5% down payment

Canadian renter population long in three times Homeownership rates in the country over the past decade. Many of these renters want to buy a home but cannot pass the insured mortgage stress test and/or make the minimum 20% down payment on an uninsured mortgage.

Ourboro Inc. thinks it has the answer. It’s basically an investor in your property, offering up to three quarters of a 20% down payment. If your home appreciates in value, it shares the profits proportionally based on the percentage of the down payment.

Here’s a simple example:

Let’s say you buy a $1 million home with a $50,000 down payment. Ourboro can provide an additional $150,000 for the required 20%. If the property climbs to $1.2 million in value and you sell, Ourboro will get back its original down payment ($150,000) plus 75% of the profit ($150,000 in this case).

Ourboro advertises several benefits to qualified buyers:

  1. They can buy almost any home worth between $550,000 and $2.5 million with as little as 5% to 10% down.
  2. Borrowers are eligible for larger mortgage loan amounts.
  3. No interest is paid on the prepaid portion of Ourboro.
  4. Investing in Ourboro is free and there is no registered mortgage.
  5. Ourboro pays its share of the land transfer tax when you buy.
  6. The company does not charge any fees.
  7. If the value of your home drops before you sell, Ourboro will share your loss proportionally.
  8. Because the mortgage is uninsured, borrowers save on default insurance costs, which can range from $20,800 to $37,000, plus interest on provincial taxes and fees, depending on the purchase price.

Whether numbers 1 and 2 are wise is the borrower’s decision, depending on their financial situation.

One thing you should be aware of is that Ourboro’s profit share is calculated before you pay the realtor commission. In other words, the homeowner pays the real estate agent’s fees.

Ourboro invests up to $250,000 per property, which homeowners can pay anytime between buying and selling. However, it has to be all or nothing. You cannot pay Ourboro in installments. Minimum household income is $65,000 and minimum valid credit score is 600.

As for lender options, they’re a bit sparse. CIBC is currently the only bank partnering with Ourboro to offer prime mortgages, according to its website. The company is in talks with a number of other lenders. For non-prime mortgages, it works with Equitable Bank and mortgage brokers.

Gary Fooks, Co-Founder and CEO 8 Twelve Mortgages Corp. is one of these brokers. With 31 percent of Canadians without a “parent bank” and needing additional help with a down payment, “I expect this ownership structure to gain a lot of traction in the coming years,” he said.

I have no doubt that he is right. So much so that I wonder if Ourboro will run out of money. The company has Peerage Realty Partners as a lead investor, which holds stakes in major developers and companies including Sotheby’s International Realty. It also takes funding from accredited investors and is reportedly working to raise significant institutional funding.

More discussion on peak rates

A better-than-expected decline in U.S. inflation this week sparked enough optimism to drive bond yields lower. That continued a downward trend in yields that began last month, sparked by investors’ belief that interest rates and inflation had peaked.

Falling yields usually mean lower fixed mortgage rates, and this time is no different. We saw the lowest widely used five-year fixed rate for the uninsured fall 5 basis points this week to 5.24%.

The lowest insurance rates are still in the mid-to-upper range of 4%.

As for floating rates, they are now 50 basis points higher than last month due to the Bank of Canada’s Dec. 7 rate hike. This puts the floating rate more than 60 basis points above the lowest fixed rate. The extra interest expense and the fact that variables are harder to qualify for — thanks, stress test — will slow their uptake.

Variable rates may become more popular in a year or so, or whenever the Bank of Canada changes its bias from raising rates to cutting them.

Lowest Mortgage Rates Nationwide

semester uninsured supplier insured supplier
1 year fixed 5.84% interest rate pivot 4.69% Explore Mortgages
2 years fixed 5.54% HSBC 4.69% Explore Mortgages
3 years fixed 5.34% first national 4.64% something
4 years fixed 5.24% first national 4.69% Explore Mortgages
5 years fixed 5.24% first national 4.69% Explore Mortgages
10 years fixed 5.94% HSBC 5.54% something
Changing 5.90% interest rate pivot 5.25% something
5 years hybrid 5.67% HSBC 5.94% Scotia eHOME
Heroco* 6.45% HSBC Not applicable Not applicable

*Home equity line of credit.Source: Robert McAllister; data as of Dec. 15

The rates shown in the attached table are as of Thursday from providers who offer rates advertised online and offer loans in at least nine provinces. The insurance rates apply to homebuyers with less than 20 percent down, or to those transferring an existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include an applicable lender’s rate premium. For providers whose rates vary by province, the highest rate is shown.

Robert McLister is an interest rate analyst, mortgage strategist and You can follow him on Twitter: @RobMcLister.

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