The Conservative Party of Canada has pledged to create a new market for fixed mortgages in the seven- to 10-year range in a bid to create housing affordability, and the pledge holds water, says a Toronto-based mortgage professional.
Such a move would “provide stability both for first-time home buyers and lenders, opening another secure path to homeownership for Canadians, and reducing the need for mortgage stress tests,” the party said.
The Conservatives also want to amend the mortgage stress test “to stop discriminating against small business owners, contractors and other non-permanent employees including casual workers,” and eliminate it altogether for borrowers who want to shop their mortgage to different lenders, effectively forcing the latter to offer more competitive rates.
Laura Martin, COO of Mortgage Matrix Global, says fixing a mortgage rate for seven to 10 years would negate the need for a stress test if homeowners refrained from refinancing them for a prolonged period of time, resulting in a huge affordability boost for buyers. It would also slow ballooning mortgage debt, which reached $1.98 trillion in May.
A household with $125,000 annual income qualifying for a mortgage with a 15-20% down payment at 2.44% from an A lender would, because of the stress test, be restricted to $600,000 with a monthly payment of $2,669.90, representing 33% of the total debt service (TDS) ratio. However, CMHC has a 44% TDS, and Martin says that households should be able to afford a mortgage of up to $800,000 with $3,600 monthly payments.
“This is a magnitude of $200,000 in borrowing power, with the same income and same rate,” she said. “The only differentiating factor is the stress test qualifications. This is because, under the 5.25% [stress tested interest rate] calculation, the mortgage payment on $800,000 is $4,792. At the actual rate of 2.44%, the payments would be $3,578 a month. This seems like a comfortable payment if it is secured over five, seven or even 10 years. Our neighbours to the south already have 10-25-year terms as a norm.”
A common refrain in the mortgage industry is that Canadians use their homes like ATMs, but by creating incentives to keep their mortgages intact homeowners would benefit from greater affordability.
“There is a concern about how it may actually play out with bank penalties, however. The average mortgage holder refinances every three or so years, even though they get five-year closed terms,” said Martin. “Still, it is so far the most cohesive and realistic strategy for assisting with income qualification for real estate market entrants, aside from the massive amount of down payment needed to get in the door.”