How Some People Still Beat the Mortgage Stress Test

Grandfathering Remains in Effect

• Okay, you really shouldn’t be as happy as these people if you have to do an end-around to pass the stress test, but nonetheless… If you’re switching lenders to get a better deal, the best 5-year mortgage rates are usually available only on insured or insurable mortgages. And that’s a problem if your property value has shot above $1 million since you got your mortgage. Reason being: the government doesn’t normally allow insured/insurable mortgages on $1+ million properties.
• Fortunately, some lenders have a workaround. If you got an insured/insurable mortgage prior to October 17, 2016, you may qualify to be grandfathered. That means the lender can:
  • Still offer a great insurable rate even if your property value has risen above $1 million.
  • Qualify you using the “contract rate” if you’re getting a 5-year fixed mortgage (as opposed to the much higher benchmark rate).
    • In other words, you’ll be asked to prove you can afford a payment at just 1.99% instead of 4.79%, making it easier to get approved if your debt ratios are high. (Virtually no one should get a mortgage if their debt ratios are too high, or expected to remain high.)
• Spy Tip: To qualify for grandfathering, you cannot have refinanced your mortgage (e.g., increased the loan amount or extended the amortization) after fall 2016.

New 5-year Low

• Meridian Credit Union now has Canada’s lowest 5-year fixed rate ever directly offered from a lender: 1.75%. It’s for high-ratio (insured) mortgages in Ontario only. More details…

Deferral Update

• There are $170 billion of mortgage deferrals outstanding at the Big 6 banks, as of July 30. The vast majority of them expire by the end of October. Here’s a quick tally of the percentage of big-bank mortgages that are deferred (Source: National Bank Financial):
  • BMO: 14% (vs. 14% in Q2)
  • CIBC: 15% (vs. 16% in Q2)
  • NBC: 5% (vs. 11.9% in Q2)
  • RBC: 12% (vs. 18% in Q2)
  • Scotiabank: 18% (v.s 17% in Q2)
  • TD: 12% (vs. 14% in Q2)

OSFI to End Mortgage Deferral Capital Relief

• Canada’s banking regulator is eliminating special capital treatment for mortgage deferrals granted after September 30.
• What does this mean? Well, OSFI says, “Under normal circumstances non-performing, or past-due, loans are subject to higher capital requirements than performing loans. By allowing banks to treat [deferred] borrowers as performing, banks’ capital requirements are not required to rise due to payment deferrals.”
• The date OSFI chose coincides with the deadline for applying for payment deferrals at most banks: September 30.
• Given its reduction in capital relief from six months to three months, it may be more likely that banks limit new mortgage deferrals to three months, starting September 1.
• Borrowers are still encouraged to ask their lender for help after September if their income has been seriously hit by COVID-19.

A New Homebuyer Confidence Survey

• “Canadians are almost equally split in their confidence in Canada’s real estate market, with 39% as confident as they were prior to the pandemic, and 37% slightly less confident,” says Re/Max.
  • That’s an improvement from the May version of the survey, when 58% were less confident.

Insured Borrowers Still Rock Solid

• Some believe default-insured borrowers are a high risk. Apart from having less equity than the average borrower (5-10% versus 20%+), CMHC’s latest data doesn’t support the elevated risk thesis. Here’s how a typical insured borrower stacks up:
  • Average credit score: 757
  • 34 out of 10,000 insured borrowers are 90 days past due, just a tenth of a percentage point above the national average.
    • This number will increase in the next 12 months as deferrals and income support programs wind down
  • Average gross debt service (GDS) ratio: 27.3%
    • Well below the 32% traditional guideline
  • Average total debt service (TDS) ratio: 36.8%
    • Comfortably below the 40% traditional guideline
    • Almost 1 in 5 have high debt ratios (e.g., a TDS over 42%)
• It’s worth noting that these debt ratios are calculated using the stress test rate. In other words, borrowers’ actual debt ratios are much lower than the numbers above. That’s because CMHC uses the inflated minimum qualifying rate to calculate the borrower’s theoretical mortgage payments.