Stress test survives but fixes have flaws
March 28, 2019
Despite intense lobbying from the real estate and residential construction industry, the federal government retained the mortgage stress test when it presented the federal budget.
Instead of ending the requirement that all buyers must qualify for higher mortgage rates than the rates that are widely available, the Finance Minister opted for two different approaches:
- An expansion of the maximum amount of registered retirement savings plan (RRSP) funds from $25,000 to $35,000, or $70,000 per couple, that can be withdrawn from an RRSP for a home purchase without penalty. The money must eventually be repaid to the RRSP to qualify.
- A new $1.25 billion mortgage equity sharing program—the First Time Home Buyer Incentive. This is a form of shared-equity mortgage from Canada Mortgage and Housing Corp (CMHC). Finance Minister Bill Morneau explained that on a $400,000 home with 10 per cent equity sharing, the incentive would reduce monthly payments by $225 per month ($2,700 per year). It is anticipated 100,000 first-time buyers will benefit from the incentive, he said. The buyer would repay the $40,000 to CMHC when their home is eventually sold.
According to mortgage brokers and real estate agents contacted by Home
BUILDER magazine, both new programs have some serious flaws:
- Most first-time buyers struggling to buy a home have very little in RRSP savings. RRSP withdrawals are currently used by less than 10 per cent of buyers. Also, the program’s $400,000 cap on a home purchase would shut out most buyers in Vancouver and Toronto, where buyers face the biggest challenge.
- Shared-equity mortgages have been tried before without success (a similar provincial program in B.C. some years ago was nixed because of low participation) because many lenders are wary of what in reality constitutes a lien on the home—in this case by the federal government. Also, first-time homebuyers are investing in the real estate ladder and most do not want to share in any proceeds that may help leverage them into their next home purchase.