The Impact of Mortgage Stress Tests on Young Buyers

Recent data indicates that the youngest buyers in the country are affected most by the government’s mortgage stress test. According to recent industry insight reports from TransUnion, mortgage originations were down nearly 8.9% in Q2. As compared to last year, originations from buyers between ages 18 and 25 are down 13.4%. This is the fourth consecutive quarter that balances and mortgage originations were down on an annualized basis.

The mortgage stress test was implemented with the intention of cooling the overheated housing market and try to prevent homebuyers from overextending themselves with mortgage debt. However, there are signs of unintended consequences. There has been a rise in co-borrowing in an attempt to qualify for properties. This is when multiple customers make an application together. This process is nothing new, it is often with the help of a parent, friend or a relative rather than just a spouse or a partner.

Impact on Younger Buyers

The younger demography of homebuyers is most affected by the mortgage stress tests. This is because they are in the earlier stages of their careers and are mostly receiving lower salaries which makes it harder to pass the stress test. Those with a down payment of 20% or more, are required to qualify at the contract rate or the Bank of Canada’s benchmark rate (5.19%), whichever is greater. While uninsured mortgages are stress tested at the greater of the benchmark rate or the contract rate plus 200 basis points.

This limits both, the size of mortgage that the young home buyers can obtain and their ability to qualify for the mortgage stress test rules. In many of the major markets, younger customers have been priced out of home buying.

Increase in Debt Levels

Mortgage debt has been trending downward, however overall debt held by Canadians rose 4.3% year over year to $1.88 trillion. Millennials led this trend with their debt levels increasing by 12.3% to nearly $516 billion. It was noted in the report that the increasing levels of debt represents a shift in generational lending. Banks and other institutions continue their attempt to adapt and evolve their business models to provide more options and a better customer service for Millennials.

Reports also revealed that lenders may be taking a cautious approach to new lending. This is due to the decline in the size of new credit limits in the quarter. The data also shows a decline in average mortgage sizes by 3.6% and a drop in the average line of credit limit by 19.7%.