The new mortgage rate stress test, which forces all holders of insured mortgages to qualify at the Bank of Canada’s benchmark five-year rate, has opened the door for big banks to influence the market, according to one economist.
The Bank of Canada’s benchmark rate is closely tied to big bank posted rates. And that relationship could allow lenders to tinker with their posted rates in a bid to influence the BoC’s, thereby allowing them to also influence the ease with which homebuyers can qualify for an insured mortgage.
“Another possible solution is that posted rates could fall, reducing the impacts of the stress tests. Since they are not set by the market, lenders could decide to lower them if, for example, they find that they are saying “no” to too much good business,” Will Dunning, chief economist of Mortgage Professionals Canada, wrote in a research paper entitled Slamming on the Brakes: Assessing the Impact of Changed Criteria for Mortgage Qualification
. “The posted rates are set administratively by the lenders, based on their assessments of what is in their best interests, and their assessments could change.”
Dunning notes that banks enacting this sort of influence is unlikely. Still, the possibility still exists.
Further, he delves into issues with using the posted rate to qualify, noting the fluctuations in qualification criteria a borrower goes through throughout a five-year mortgage period.
“The calculations that will be made for mortgage qualification will use current data (on principal amount, amortization period, and the borrower’s income) to estimate conditions that might exist five years in the future,” Dunning wrote. “All the three of those conditions will have changed in five years: the remaining principal will have been reduced, the remaining amortization period will have been shortened, and the borrower’s income will have changed (hopefully it will have increased).
“Therefore the estimates are incorrect as to the debt service burden in five years.”
Dunning’s 18 page report delves into the various other impacts the mortgage rule changes are expected to have. Click here to read the full report
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