When the stress test came out for conventional mortgages earlier this year, there was a lot of concern for people qualifying for new mortgages including both purchases and refinances. In general, the stress test has reduced what people qualify for by at least 20% on average. In addition, it has made it more difficult to shop around for your mortgage renewal.
The stress test rules, which are designed to cut out risky lending, are also making it harder for borrowers to switch lenders and this means the country’s biggest banks stand to keep more of their mortgages on the books at renewal time.
The stress test means that borrowers have to qualify for a mortgage at a rate that is 2% higher than the rate they are paying. This applies to all mortgages even if the borrower is only borrowing the same amount of money they currently owe when they qualified under the old mortgage rules.
While the big 5 banks account for approximately 2/3rds of the Canadian mortgage market they are also reporting higher rates of renewals by existing customers as these customers are concerned they will not qualify for a mortgage with another bank.
So in effect the stress test has reduced competition and given a larger percentage of customers less choice upon renewal. The banks expect their mortgage books to continue to grow as they retain more mortgages upon renewal despite the fact that purchases are trending downwards. Borrowers are tending to stay with their bank more often despite paying higher rates fearing the new rules will make it harder for them to qualify. This ultimately gives them less choice and forces them into higher rates.
At the end of the day the banks can become more sophisticated in targeting borrowers who would not qualify under the stress test and charge them a higher rate at renewal because they know they won’t qualify elsewhere.
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