Are Mortgage Stress Tests Putting the Economy at Risk?
For many Canadians in major markets such as Toronto or Vancouver, housing affordability is a hot button issue. In response to escalating house prices and levels of consumer lending, the Government of Canada in 2018 implemented the B-20 stress tests, which required banks to test a borrower’s ability to make mortgage payments at 200 basis points (2%) above their mortgage rate.
While there has been a noticeable slowdown in housing sales, there’s another sector of the lending ecosystem which has benefited greatly from the B-20 stress tests: private mortgage lenders.
According to data from the Bank of Canada in November 2018, private lenders in Toronto have seen an increase in the volume of activity because of the new rules being applied to banks. Individuals looking for a mortgage with a private lender can end up paying anywhere from 10% to as much as 15% or higher. A significant portion of the private lending market is driven by Mortgage Investment Corporations (MICs) which pool capital, usually from high net worth investors, then use that capital to lend to consumers through the private lending market. Investors in the MICs are typically paid north of 6% for this type of investment.
While the private lending market has been free from the same kinds of lending rules imposed upon traditional lenders, that may soon change.
Recent articles in the Financial Post and Globe and Mail detail growing whispers for the private mortgage lending marketplace to be subject to the same stress test rules that traditional mortgage lenders have to now abide by. The growth in private lenders seems to support the premise that house hungry consumers who can’t get a mortgage with a traditional lender are turning to private lenders whose lending criteria aren’t as stringent.
Clearly there are many complex moving parts to the mortgage lending industry and the consequences, both intended and unintended, of government intervention are starting to materialize for consumers.
While the targeted outcome was to curb consumers seeking out mortgages on properties they could not afford to pay for over the medium to long term, it appears that it is these specific borrowers who are being pushed into less affordable borrowing scenarios.
Demand for housing still remains high enough that consumers are turning to non-traditional lenders to finance their purchases which ironically makes them even more vulnerable to financial ruin. So long as demand for housing continues to be greater than supply, however, the stop gap measures of trying to curb consumer behaviour will create fresh challenges for government, lenders and consumers to have to overcome.