3 ways to improve the mortgage stress test

At the end of 2018, I wrote about the idea of reducing or repealing the mortgage stress test. Now I want to suggest some possible amendments that would make the stress test more fair now that interest rates are rising and home prices are still high. 

Don’t get me wrong - I’m not anti-stress test. Back in May 2018, I even wrote about how the stress test was actually helping buyers. Weaker borrowing power prevented many would-be buyers from getting in over their heads in a burning hot market. People were getting swept up in the frenzy, submitting offers without conditions, bidding way too high, and shopping around new home sales centres that may have exceeded their budgets.  

The stress test was a significant factor in making 2018 a year of moderation in the Greater Toronto Area housing market. This year, the moderation will continue, and the market will likely be more balanced than last year. The stress test did its job and now it’s time to revisit. Here are a few changes that I think would make the stress test more fair:

Reduction for first-time buyers

First-time buyers need all the help they can get in order to enter the market. There are first-time buyers out there who are responsible with their money, but may not be able to afford a rate two points higher than their contracted rate. Or maybe they can afford it because they’re disciplined enough to put more towards their mortgage and cut back elsewhere. With news that rate increases are slowing down this year, I think it makes sense for first-time buyers to have to qualify at 1% or 1.5% above their rate. 

Consider careers and growth potential     

Young professionals can experience a lot of growth in the first five years of their careers, depending on their training and type of job. Perhaps banks and other major lenders should consider the careers of their applicants and the associated earning potential. If you’ve held a job for a couple years in a skilled field, and there’s still plenty of room to grow, I believe this should be taken into consideration. In some cases, I do feel like lenders look at growth potential, but this potential should carry more weight.   

Ease up on entrepreneurs 

Banks and lenders think entrepreneurs are risky borrowers because their income is in their own hands. I’ve always had a problem with this. Millennials are starting more businesses at a younger age, compared to baby boomers, and many of them still value homeownership. If you own a business and have applied for a mortgage, you know how difficult it can be. You need to supply way more paperwork, like business financials, in order to prove that you can pay yourself and that your business is healthy and growing. 

What I find frustrating is that many of the young business owners I know are just starting out or are a few years into their business, but they are all smart, skilled individuals who can potentially be making more money working for someone else. So, in many cases, if the business fails, worst case scenario is they go get a job making the same amount or more money. Of course, this isn’t the case across the board, but I think banks should be open to this possibility when reviewing an entrepreneur’s application.   

I can see a lot of people reading the above and thinking these are the exact types of people that the stress test is designed for, but I tend to see the best in people. Young, skilled, ambitious, working professionals deserve a chance to make their dream of homeownership come true. 

Ideally, I’d like to see the stress test reduced for all borrowers, but if that’s too drastic, at least a couple of the ideas I shared would be a step in the right direction in order to ensure healthy market growth throughout 2019.