Rules and Regulations

Reform the mortgage stress test

Many aspiring homeowners have been sidelined by the government’s B-20 regulations (the “stress test”) that came into effect in January 2018. Canadians in some markets are now forced to save more, over a longer time period, for a down payment or buy a less expensive home.

CREA data indicates sales activity for residential units in 2018 reached its lowest point since 2013 and the June 2019 forecast anticipates sales for the rest of the year will remain at 2018 levels. This indicates housing markets across Canada continue to struggle and are not adjusting to the policy change.

One of the unintended consequences of the stress test has seen borrowers move away from the regulated market to less-regulated options. This generates a greater potential for borrowers to pay higher rates of interest.

A balance must be struck to address the government’s concern with debt and the fulfilment of Canadian’s homeownership aspirations. Of particular concern is the restricted ability of first-time home buyers, including millennials and new Canadians, to enter the housing market. While new measures proposed in Budget 2019 will provide relief to some, additional measures are required.

This is why CREA calls on federal political parties to consider:

  • All real estate is local and just as real estate markets vary across the country, so should the policies and programs that affect these housing markets. Adjusting the stress test to make it more regional in nature would allow the test to better fit with the realities of each real estate market across the country. A regional test would consider factors such as housing market activity, average cost of a home in that market, employment levels, average income and cost of living in the area. There is precedent for national programs to be tailored to address regional socio-economic factors. For example, there are regional applications of the Employment Insurance Program that reflect the realities of local or regional labour and employment markets.
  • Allow existing mortgage holders to be exempted from the stress test at the time of renewal. Responsible borrowers who have demonstrated prudent debt management and are not increasing their loan amount should not be penalized and forced to stay with the same lender. Removing the stress test in these situations would lead to more competitive mortgage rates and allow borrowers to reduce their debt faster.

CREA acknowledges there may be other ways to reform the stress test to support Canadians on their homeownership journey. A comprehensive and transparent review of the stress test is warranted to allow policy makers to fully understand the impact and negative consequences it continues to have on housing markets across the country and address them.

Modernize mortgage lending practices

Each year, thousands of Canadians enter the ranks of the gig economy—a labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.

The less predictable aspects of the gig economy, like fluctuating incomes, have made it difficult for these Canadians to secure mortgages. The criteria for mortgage borrowers typically favor applicants who can demonstrate financial stability and consistency—qualities which assure lenders that their borrowers will be able to keep up with loan payments.

CREA recommends federally regulated lenders be encouraged to accommodate the growing number of Canadian gig workers seeking to enter the housing market. Rules governing income verification and reasonability of income must continue to adapt to changing trends of employment.