It may not be a popular opinion, but one veteran broker argues there should be tougher standards for qualifying for a five-year fixed-rate mortgage.
“100% there should be tougher standards for qualifying for a five-year fixed rate; I’m in awe that they haven’t done it,” Calum Ross
, principal broker of Verico
Calum Ross Mortgage, told MortgageBrokerNews.ca. “With the Big Short movie out and everyone saying Canada is immune (to a similar downturn); I’m going to say the five-year qualifying rate is a disaster waiting to happen."
Clients taking a five-year mortgage rate can qualify at the contract rate. However, variable rate mortgages and fixed mortgages under five years typically require homebuyers to qualify at a higher “benchmark” rate.
Ross, who has both an undergraduate and an MBA in finance, argues many clients who currently qualify for a five-year fixed-rate would face potentially unsurmountable economic challenges if rates were to increase.
“You can put this in real terms: If that 1% interest rate increase is realized, that means five years from now my income would have to increase by 33% to maintain my current debt servicing numbers,” Ross said. “Real wage growth in every province is not above 3%. So you would have to be a statistical anomaly just to keep your head above water.”
Ross estimates that half of mortgage holders have a five-year fixed-rate mortgage product and many of them have maxed out their debt servicing numbers.
He argues even a 1% increase in interest rates could be difficult for these clients to handle.
“It’s unrealistic to think today’s interest rates are going to be around forever,” Ross said. “Five years from now if interest rates increase 1%, that’s a hell of a big pill for the average Canadian to swallow.”
Ross also argues the current qualification standards pose a risk to the industry.
“I worked in global treasury in London before working in the mortgage industry; I’ve taught finance at the MBA level. It’s unequivocally a risk,” he said. “I don’t think there is a risk; I know there is a risk. It’s just how much of a risk there is.”
Ross’ argument in favour of tougher qualification standards may not sit well with many brokers. When told this, he replied:
“In a perfect world I would be both respected and liked but, if I have to pick between being respected versus being liked, I will take being respected every time,” Ross said. “Anyone who doesn’t’ think the five-year qualifying rate is a disaster waiting to happen simply doesn’t’ understand credit capital markets or default risk.”