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Two weeks ago I did a presentation at a Real Estate office to discuss the mortgage Stress Test and what the Government might be looking to do. It’s an election year and our industry association, Mortgage Professionals Canada, has been lobbying hard and advocating on behalf of both the consumer as well as industry members and more recently you might have heard the Federal Government say that they are looking at ways to make housing more affordable for Millenials. Of course the Stress Test was brought forward as a topic and interestingly enough I came across an article yesterday titled, “Morneau taking close look at return to 30-year insured mortgages, homebuilders’ association says”…click to view. I wouldn’t say I’m psychic, but I would say we are thinking along the same lines.
What would the Government do?
We know the Stress Test is not going away, it’s just not. So… the Government has two options as I see it. 1) lower the rates used for Stress Test qualifying rate or 2) bring back the 30-year amortization.
Let’s take an income of $84,000, single income or combined income, for this illustration with 5% down. Based on today’s qualifying rate of 5.34%, the max mortgage would be $415,000.
Let’s suggest the qualifying rate is lowered from Benchmark rate of 5.34% to contract (rate 3.59% today) plus 1% for a qualifying rate of 4.59%. In this case the max mortgage would increase to $450,000(+/-).
Not bad…but what about a 30-year amortization?
Let’s take the same $84,000 income, qualifying at today’s Benchmark rate of 5.34% but over 30 years, that would increase the max mortgage amount to $450,000(+/-).
So both scenarios yield the same result, but which works out better for the consumer?
From a monthly payment perspective, the 30-year amortization is the clear winner, as the monthly payment would be significantly less than that in Scenario 1. A lower payment allows for improved cash flow at the end of the month. A person can always shorten their amortization by simply increasing their monthly payment.
Which scenario works out best for our Government?
Scenario 2 would work out the best for Government because to go from a 25-year amortization to a 30-year, CMHC (Canada Mortgage and Housing Corporation) would increase the insurance premium for the privilege…likely somewhere between 0.25% – 0.50%. with 5% down, what would be 4% insurance premium under Scenario 1, would now be 4.25% – 4.50% under Scenario 2.
Now, when I shared this with an industry buddy a couple of weeks ago, he said, “makes sense but there is no way the Government has put as much thought into all this as you have…you’re over thinking it”. Perhaps I am and sometimes I over analyze. But if I am the Government, I’m doing whatever makes the most cents (pun intended) for me and doing it in the name of helping consumers.
Before we make our best educated guess as to what our Government might do…let’s first remind ourselves how we got here.
The Department of Finance, Bill Morneau’s office, in consultation with CMHC’s President & CEO Evan Siddall decided that it was time to slow the housing market.
Citing mortgage debt was getting out of control and they needed to protect consumers. We all heard this story, right?
However, what many don’t know is what both Morneau and Siddall really thought. What were they really after?
Both were caught speaking in public and the video below has Evan Siddall suggesting that the real concern was the fact that as consumers get into home ownership and things become tight they will save their home by not buying a car, not buying a fridge, by economizing on their groceries…and what this does is reduces consumption which reduces economic activity…blah blah blah (click video to watch). Basically, what he is saying is that they need consumers to continue spending to keep the economy going. By limiting home ownership, more people will have to rent and those renters will continue to spend. If you believe that what they are doing is indeed a good thing for consumers as a whole, then it limits/lowers the amount of mortgage a person can qualify for so they can use more of their disposable income to borrower via high interest credit facilities and spend to keep the economy going. I’m not going to tell you how you should take this, simply give it a listen and form your own opinion.
Whatever your opinion, I think you’ll agree…these are interesting times.
I look forward to hearing more from our Government on this topic as we near the election date. All I hope is that the consumer doesn’t have to wait until after the election to receive any benefit from election promises designed to sway votes. Consumers need real action now! My fingers are crossed.