Alberta pushes Ottawa for revisions to mortgage stress test as changes left on hold

For two and a half years, the province has been pushing the federal government to adjust its mortgage stress test, arguing the current rules are an unnecessary barrier to home ownership for many Albertans.

Federal test checks if homebuyers could handle an increase in mortgage rates without defaulting on payments

Alberta is asking Ottawa to make changes to its mortgage stress test requirements. (Bryan Labby/CBC)

The province has been pushing the federal government to adjust its mortgage stress test for 18 months, arguing the current rules are an unnecessary barrier to home ownership for many Albertans.

Back in August 2019, Alberta Finance Minister Travis Toews sent a letter to his then-federal counterpart Bill Morneau about the matter. CBC News obtained the letter through access to information laws.

"We have significant concerns about the inflexible B-20 mortgage stress-testing rules, which are creating an unnecessary barrier to homeownership in Alberta," Toews wrote. 

Starting in 2017, all homebuyers applying for a mortgage are required to undergo a stress test. The parameters require that borrowers prove their ability to make mortgage payments if interest rates increase.

The test looks at whether buyers could withstand an interest increase of two percentage points on their contracted rate or the Bank of Canada's five-year benchmark rate, whichever is greater.

It was intended to decrease the risk of owners defaulting on their mortgages and slow the price growth in hot markets.

Toews' letter said that despite severe economic challenges, Albertans have a very low default rate and those looking to buy homes didn't need limitations on the pricing or size of homes they could consider. 

He asked for the federal government to "immediately" reform the testing measures to be more appropriate to the housing market in Alberta and other similar parts of the country. 

He added while the mortgage rules might be appropriate in overheated markets like Toronto and Vancouver, they have unintended consequences for places like Alberta where overbuilding is often a concern and housing prices haven't skyrocketed.

First-time buyers, families upgrading most affected, minister says

It's been 18 months since that letter was sent and Toews is still trying to make headway. 

His office says the minister continues to make formal representations to his federal counterparts (earlier with Morneau and now Minister Chrystia Freeland) through letters and presentations at meetings. 

"Many Albertans have been impacted by the new mortgage guidelines. It is more difficult for first-time home buyers to qualify for home ownership. Homeowners who want to sell their home and move into a larger home have also likely had their choices limited as a result of the new guidelines," a statement from his office reads.

In response to questions from CBC News, the federal department of finance said the government is keeping an eye on housing issues.

"The Government of Canada has taken action to support access to housing, and reinforce the Canadian housing finance system to safeguard financial stability. We continue to closely monitor the health and stability of the housing market," the department said.

James Laird, the co-founder of RateHub, doesn't fully agree with the province's analysis. 

"I think that some manner of stress test is appropriate in all markets. All the stress test says is even though you're getting this lower rate on your mortgage, we want to make sure that you're still able to qualify if rates go up by a few percentage points," he said. 

Neither the federal nor provincial governments were able to provide recent, exact figures of how many people were barred from home ownership because of the test rules. When it was introduced, TD Economics estimated that the stress test eroded buyers' purchasing power by 20 per cent.

The Canadian Real Estate Association says the average home price in Alberta has increased by nine per cent in the last year, from $386,653 to $421,903 — and Calgary housing sales have soared to a level not seen since 2014.

Last February, the federal finance department announced a change to how the qualifying rate for the test would be calculated, but the implementation has been put on hold because of the pandemic. That change would ease the intensity of the test, giving buyers more options.

Planned changes welcomed by brokers

Some brokers are hoping that change comes quickly.

"We definitely are looking for changes to the stress test," said Janelle Bentz, the owner of Dominion Lending Centres Calgary.

"They were going to reduce it and recalculate it based on two per cent of the benchmark five year going rate, which would have been perfect. That's actually exactly what we were asking for and then the pandemic hit."

Bentz said this iteration of the test puts pressure and inflexibility on buyers, especially for first-time owners or families who need to upsize. It also puts lower-priced houses in higher demand, which could drive prices up through bidding.

"It definitely is a hindrance for sure."

In February, Canada's housing agency raised concerns about skyrocketing mortgage debt, which is growing at its quickest pace since the end of the great depression. 

Alberta's market is starting to heat up as people take advantage of historical low interest rates, but Laird warns that interest rates will slowly creep up as the economy recovers.

"Good news is actually bad news for mortgage rates. So the better the news, the more mortgage rates will rise."

With files from The Canadian Press