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Government is Still Roadblocking First-time Home Buyers: Viewpoint

The Feds would like you to think they want to help first-time buyers. The Liberals’ over-hyped and costly First-time Home Buyer Incentive is a case in point.

“The First-time Home Buyer Incentive makes it easier for you to buy a home,” they say.

What the government omits to mention is that it’s stood by and allowed the mortgage qualifying rate (“stress test”) to become scandalously burdensome. This chart below says it all.

stress test spread - 5-year posted rate vs the best 5-year fixed
Despite diving interest rates, the stress test has made qualifying for a mortgage progressively more difficult compared to policies that existed for decades prior to fall 2016. This problem became especially acute after the government applied its minimum stress test rate to all federally regulated uninsured mortgages in January 2018.

If you’re a hopeful first-time homebuyer getting a default-insured mortgage (i.e., you have less than a 20% down payment), Department of Finance officials are now forcing you to prove you can afford a rate that’s a whopping 348 basis points above the lowest 5-year fixed rate on the market.

That is a record.

In other words, the government’s mortgage stress test has never been tougher relative to true mortgage rates that people actually pay.

That means not only are home prices running away from you, but Ottawa’s bureaucrats, whose salaries are paid by your taxes, are essentially saying, “Too bad, so sad. Even though your chances of default are less than 1 in 200 statistically, we’ll let the stress test get harder and harder. If you don’t like it, rent! Forget about building equity and saving for your retirement through mortgage principal payments.”

Now, few (including this author) would advocate dramatically loosening credit amid: (A) an epic run-up in home values, and (B) amid supply mismanagement (at the federal and provincial levels) that’s resulted in too few homes and too much appreciation near major employment centers.

But it’s bloody-well time for a degree of reasonability from Ottawa. In no case should regulators impose a minimum stress test rate that is 3.7 times the actual rate first-time buyers pay.

That is entirely unnecessary. There is virtually no chance rates will soar 348 basis points in less than five years in addition to borrower incomes not increasing over that time span in addition to borrowers not being able to refinance or sell before default.

Heck, 5-year forward rates—one of the best indicators of where 5-year rates will be five years from now—are only projecting a 93-basis-point jump in rates by 2026 (source: Bloomberg).

If you’re a typical first-time buyer in a big city, the government seemingly doesn’t give a hoot about your mortgage qualifying woes. If it did, it would do something about its drastically over-inflated stress test rate, like the Liberals pledged to do in December 2019….before abandoning those plans last March.

Opinion / editorial content solely reflects the views of the author.

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