Insured Mortgages Plummet in Wake of “Stress Test”

Strict rules have eliminated a third of mortgages with less than 20% down, says CMHC
Joannah Connolly
August 29, 2017

Last fall’s introduction of the “stress test” on insured mortgage applicants has resulted in a sharp decline in the number of insured mortgages being issued, according to the Canada Housing and Mortgage Corporation in its second-quarter financial results, released August 29.

The strict mortgage qualification requirements were the main reason for the 33% year-over-year drop in the number of insured mortgages issued to Canadians in 2017’s second quarter, said the federal housing agency.

CMHC said in its latest financial report that it provided mortgage loan insurance to 78,607 units in the quarter ending June 30, compared with 117,463 units during 2016’s second quarter.

The agency said in its results announcement, “Volumes decreased largely as a result of the new regulations announced by the federal government in the fourth quarter of 2016.”

The rules require all home buyers with less than a 20% down payment to undergo a “stress test,” meaning that their household income must qualify them to borrow at a higher interest rate than they will pay, to ensure they can still pay their mortgage should interest rates rise or their finances change. These new requirements have considerably reduced the loan amount many applicants are able to borrow, cutting their purchasing power or, in some cases, removing their ability to buy a home at all.

The second-quarter decline in insured mortgages could be indicative of fewer mortgages being issued overall, or simply the result of more home buyers raising at least a 20% down payment, in order to qualify for a higher mortgage and avoid the stress test.

However, this fall, the Office of the Superintendent of Financial Institutions (OFSI) intends to expand this stress test to require all new mortgage applicants to qualify at the higher posted rate (currently 4.64%), even if they have more than 20% down and an uninsured mortgage.

A TD Bank report Navigating a Soft Landing, issued August 28, said that the imminent tightening of these mortgage qualification rules could mean home prices in some areas of Toronto and Vancouver may fall by up to another 10% as buyers’ purchasing power is further reduced.

The CMHC also announced that it has also seen an improvement in the number of insured mortgages going into arrears across Canada. The agency says its overall arrears rate was 0.29% in the second quarter, which is down from 0.32% in the first quarter.

The housing agency’s announcement follows a study it released in July that revealed the number of mortgages and the total value of those mortgages was up in 2016 compared with 2015, but delinquencies were down.

Joannah Connolly
Joannah Connolly is editorial director of Glacier Real Estate, Glacier Media's real estate division. Joannah writes and curates real estate news for Glacier Media's local newspaper websites, including the Vancouver Courier, North Shore News, Burnaby Now, Tri-City News and others. She also oversees editorial content in Real Estate Weekly Homes, West Coast Condo, Western Investor and Glacier's special real estate publications. A dual Canadian-British citizen, Joannah has 22 years of journalism and editing experience in Vancouver and London, with a background in construction, architecture, healthcare and business media. Joannah has appeared on major local TV outlets as a real estate commentator, has moderated and spoken on various industry panels, and spent two years hosting the Real Estate Therapist radio show on Roundhouse Radio.