Save for 4,635 Days. Beat the Stress Test

Just failed the mortgage stress test and feeling down?

Have no fear, a bigger down payment will get you to the mortgage promised land.

By putting down more, you’ll lower your debt ratio and be passing the stress test before you know it…as long as you don’t expect a mortgage before 2031.

That’s how long stress test flunkies would have to save to beat the stress test—if they were a median borrower with no other resources and they socked away 3.5% of their income per year—according to Bank of Canada researchers.

After 12.7 years of saving, the bank estimates you’d have a big enough deposit to offset the credit-constraining effect of the 2018 (“B-20”) mortgage stress test.

Note: The Bank of Canada actually suggests it may take half that long if people save 7% of their income, but how many people save 7% when half of Canadians are living paycheque to paycheque and personal savings rates are plunging.

The Caveats

The BoC makes some critical assumptions. For one, it says “Our calculations implicitly assume a constant ratio of house prices to incomes.”

Is that a bet you’d make?

In the last 15 years (Dec. 2003 to Dec. 2018), average weekly earnings are up 47%.

Home prices, meanwhile, are up 123%.

That ratio doesn’t seem so constant, but maybe it’ll revert to its mean. Either way, there’s a legit chance a stress test reject would spend years saving only to find the housing goal post moved on them, into another stadium.

Just wait for the Crash

Why save more when you can just wait for a bear market in real estate?

“We find that a 20 per cent reduction in house prices (relative to incomes) would eliminate the need for additional savings among all borrowers affected by the stress tests,” says the BoC.

Now there’s something to root for. (If you don’t mind recessions with your housing crashes.)

Nevermind that Canada has never had a 20% correction on a national basis since 1980 (as far back as CREA’s average price data goes). Albeit, we certainly wouldn’t bet against it.

The message here is that the stress test is a big deal. There are few quick workarounds, assuming you don’t have well-off parents or the ability to drastically lower your housing expectations. One loophole that does continue is credit unions qualifying borrowers at the contract rate (more on that).

“…The revised B-20 guideline affected roughly 10% of borrowers within the uninsured [mortgage] market, which comprised about 75% of the mortgage market,” the bank’s staff wrote. That’s a meaningful number of would-be homebuyers being relegated to the sidelines. See ya’ll in 2031.