New rules aimed at cracking down on the mortgage market will result in 100,000 people failing a stress test of their finances, and about half of them will be blocked from buying a home.
That's one of the major takeaways of a new report published Tuesday from Mortgage Professionals Canada, an industry group that represents 11,500 mortgage brokers, lenders and insurers.
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The federal government has moved seven times since 2008 to tighten rules surrounding the real estate market, and practically every time, the market has shrugged off tighter rules around areas like maximum debt loads and amortization periods.
But new rules implemented in October could be different.
Starting January, uninsured borrowers from federally regulated lenders must have their finances "stress tested" to ensure they would be able to pay off their mortgages if rates were higher than they are today. To do that, the lender must run a test assuming rates were two percentage points higher than they are right now, and see if borrowers would be able to pay off the loan.
By the group's estimates based on the market today, "18 per cent of mortgage borrowers who are stress tested, would fail the stress test."
Since there's roughly 700,000 homes sold every year in Canada, and most of them involve some sort of mortgage. That means up to 100,000 buyers would fail the new stress test and be forbidden from buying the home they want at the price they want.
"Perhaps 50,000 to 60,000 per year will be able to make a different purchase, albeit one that is less attractive to them," the group said. But "perhaps 40,000 to 50,000 per year will be entirely removed from homeownership."
The group says it doesn't object to the idea of a stress test in general, just that the current parameters are too rigid. Essentially, the mortgage group says running the numbers with rates that are two percentage points higher than they are today isn't realistic or helpful..
For starters, the majority of new buyers get a five-year fixed rate mortgage, which means if they lock in now. they would be immune from rate hikes until 2022.
Currently, the average mortgage rate in Canada is 2.96 per cent, the report found.
Even assuming rates are higher when they have to renew, the current stress test rules ignore two things: On average, borrowers will have paid off 15 per cent of their principal, five years into their first mortgage, even if they do nothing more than make their monthly payments with no prepayments. Having more equity in their homes makes them better able to handle debt, even at a higher rate.
The stress test rules also ignore that people generally tend to see their incomes increase over time too.
"Based on trends over the past five years, mortgage borrowers will typically have seen their incomes rise by 10 per cent" by the time they renew, the group says.
A better level for the stress test, the group says, would be testing borrowers' finances at an interest rate that's three-quarters of a percentage point higher, not two.
"Using the posted mortgage interest rate today in mortgage stress tests is excessively stringent, and will unnecessarily impair the housing market and therefore the broader economy," the report found.
"And it will unnecessarily [and therefore unfairly] prevent large numbers of Canadians from achieving their reasonable housing goals."