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Stress Test Casualties

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The federal government's mortgage “stress tests” are being blamed for sidelining a growing number of young home buyers.

Among buyers aged 18 to 25, new mortgages in the last year are down 13.4 percent (vs. -8.9 percent for the overall market), according to TransUnion's second-quarter Industry Insights Report. That’s considered a substantial drop in the mortgage business.

"In many of the major Canadian housing markets, many younger consumers have now been effectively priced out of buying," the report states.

TransUnion notes the new mortgage rules are affecting first-time buyers the most, given that they're starting their careers and have lower salaries compared to the other age groups. That limits their ability to qualify under the new stricter stress test rules.

Stress Test Refresher: Being “stress tested” means you must prove you can afford a payment at a higher interest rate. Default insured mortgages (those with less than 20 percent down payments) are stress-tested on the greater of the contract rate or the Bank of Canada's 5-year fixed posted rate (a.k.a. benchmark rate). Uninsured mortgages (those with less than 20 percent down payment) are stress-tested on the higher of the contract rate plus 200 bps, or the benchmark rate, which is currently 5.19.

This latest drop in mortgage sales and total mortgage balances marks the fourth straight quarter of decline.

"The new mortgage regulations seem to be having the intended effect in cooling the overheated housing market and broadly preventing consumers from overextending themselves with mortgage debt," said Matt Fabian, TransUnion's director of financial services research and consulting in the release.

"However, there are signs of…consequences," he added, pointing to an uptick in the number of people co-borrowing—multiple consumers making an application together—in order to achieve home ownership. "Although this is nothing new, it is now often with the help of a parent, other relative or a friend rather than just a partner or a spouse."

Key Tidbits

Below are other notable mortgage findings from TransUnion's report:

  • Sales of new mortgages at the major banks was down 9.8 percent during the 12 months ended Q1 2019 (the period directly following the new stress test rules). Meanwhile, non-bank lenders and credit unions—which aren't subject to the rules—saw volumes increase 2.1 percent.
  • The average mortgage size was down 3.6 percent compared to last year. Likely causes include easing home prices and the fact it became harder (with the stress test) to afford as much mortgage.
  • There was a major milestone in the second quarter, millennials (born 1980-1994) finally reached parity with baby boomers (born 1946-1964) in terms of outstanding debt, with each holding slightly over $500 billion in total debt. TransUnion says, "This trend represents a fundamental shift in generational lending, as banks and other institutions continue to adapt and evolve their business models to provide more options and more tailored customer experience for millennials and Gen Z.”

For more insights see the Rates.ca Mortgage Guide.