Rising interest rates present a financial challenge for most Canadians. For the hundreds of thousands who bought pre-construction homes during the pandemic and are now seeking to finalize financing as they approach closing and occupancy, the challenge can be formidable.
The federal government and the Office of the Superintendent of Financial Institutions (OSFI) can help protect new home owners and send a strong signal on housing by reconsidering or, at the very least, temporarily suspending the mortgage stress test.
The stress test or minimum qualifying rate currently requires home buyers to qualify for the greater of the mortgage contract rate plus 2% or 5.25%. Introduced in 2016 and expanded in 2018, the stress test was originally intended to test borrowers’ ability to continue mortgage payments in the event of changes in economic circumstances, including rising interest rates, fluctuating house prices or reductions in income. It was part of a suite of measures brought in to cool the housing market after a period of high activity in 2016-2017.
With posted five-year rates now at 5.6%, home buyers must be able to qualify at 7.6%, a significant challenge for those who bought new homes and condominiums at a time when interest rates were at all-time lows and who are now seeking to finalize financing during the fastest increase in rates in living memory. Many will struggle to obtain financing, and the 2% additional hurdle imposed by the stress test will, in many cases, be the difference between securing the home they need and not being able to do so.
The market is also in need of a strong signal as we all wait and wonder what comes next. New projects are postponed or delayed, further constraining already limited supply. All the while, pent-up demand for new housing increases -- manifesting itself in rising rents -- as prospective buyers sit on the sidelines and new residents arrive at a record pace.
With most economists in agreement that rate hikes may be close to the peak and with economic storm clouds on the horizon, temporarily suspending the minimum qualifying rate might just be the signal the market needs. It costs governments nothing, yet it helps the hundreds of thousands of Canadians who bought a new home between 2020 and mid-2022 to close on their homes by removing the artificial 2% hurdle. It also allows the industry to get on with planning and building the housing new and existing residents will inevitably need when the economy stabilizes.