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Time to soften – or scrap – one-year-old mortgage stress test, says building industry

Measure has already done its job of cooling housing market, and rising interest rates means it’s going too far, argue builders
Mortgage calculations

Even though the mortgage stress test legislation (“B-20”) has been in place to all new mortgage applicants for less than a year, building industry leaders are saying it’s already time to reduce or repeal the act.

The stress test requires all new mortgage applicants to qualify for their mortgage at the Bank of Canada posted rate (currently 5.34 per cent) or their actual contracted repayment interest rate plus two per cent, whichever is the greater. This means most new home buyers have had their purchasing power reduced by up to 20 per cent, as they can only qualify for a lower mortgage at the stress-tested rates.

The strict new rules have been largely linked to the current slowdown in the housing market. Further, as interest rates continue to rise, so does the rate at which mortgage applicants are stress-tested, meaning that their purchasing power weakens further. Building industry leaders are now saying that the Bill B-20 has achieved its aim, and now needs to be reduced or repealed in order to keep the market in balance.

Brad Carr, chief executive officer of Mattamy Homes Canada, told Bloomberg in an interview, “We’re going to continue to lobby for a pullback now on B-20. That had a very targeted outcome. It’s been achieved so it’s kind of overkill now.”

Carr told Bloomberg that the increase in interest rates is taking over the role of the stress test. “They’re doing their natural job and, that two per cent spread, we certainly hope the government will either remove it or at least cap it,” Carr said. Mattamy Homes’ suggestion is to reduce the stress test to 1.5 per cent or one per cent above the applicant’s contracted rate.

David Foster, director of communications at the Canadian Home Builders' Association, said that the federal government should go further and simply scrap the stress test. He told Bloomberg, “Ideally at this point the best thing would be for the new stress test to be repealed, just removed. Markets like Calgary, they’re already quite soft, are just hammered by this.”

Foster argued that the stress test mostly affects first-time buyers, making it harder for them to get into homeownership – and that the longer the rules are in place, the more disenfranchised that demographic will be.