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 Mortgage 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 Mortgage 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.