Mortgage Stress Test Behind $15-Billion Drop in New Canadian Mortgages

Stress Test

iStock.com/Tero Vesalainen

The Federal government implemented a large number of strict lending rules in an effort, it said, to ensure the housing market remained stable. In addition to reducing the amortization period and eliminating down payments of zero, they also introduced a new stress test. It turns out that the stress test is putting home ownership out of reach for a growing number of Canadians. In 2018, the stress test was behind a $15 billion drop in residential mortgage borrowing. That prohibitive stress test is also showing homebuyers the benefits of using Mortgage Investment Corporations (MICs) like Mortgage Company of Canada.

New Stress Tests Means Fewer People Qualifying for Mortgages

According to a report, the federal government’s new mortgage stress test was behind a $15 billion drop in residential mortgage borrowing in 2018. It was also the biggest factor in the 8% year-over-year drop in new 2018 mortgage originations. The stress test was responsible for between 50% and 60% of the decline.1

Other factors that resulted in fewer mortgage originations in Canada last year include rising interest rates and the lack of affordable housing in major markets like Toronto and Greater Toronto Area.

What is the stress test? At the start of 2018, all federally regulated financial institutions began testing borrowers to see if they could pass a stress test, ensuring they could make their mortgage payments should interest rates rise.

If applying for a fixed mortgage with a five-year term or more, borrowers need to qualify at a rate on whichever is higher: the Bank of Canada’s posted rate on the contract, or, the rate on the contract plus 200 basis points. Keep in mind, potential homebuyers need to pass the stress test even if rates never hit that level.

At $15 billion, a huge number of borrowers are being shut out of the housing market. Those who failed the stress test have to revaluate their housing strategy: qualifying for a smaller mortgage or buying a smaller home. In Toronto and the GTA, a small budget means not even having a chance to step on the property ladder.

The stress test and other excessive lending rules are showing well-qualified borrowers the importance of alternative lenders. In Ontario, alternative lenders make up nearly 12% of the total number of mortgage transactions in 2018; up from 10% in 2017. Of that 2018 total, institutional lenders, like MICs, make up half of all mortgage lending.

Mortgage Company of Canada: Helping You Invest in High-Yield, Private Mortgages

Canada’s strict lending rules, in particular the recently implemented stress test, are taking a toll on Canada’s real estate market. At the same time, the stress test is showing borrowers how convenient, flexible, and efficient it is to use a MIC like Mortgage Company of Canada.

More and more borrowers being turned down by Canada’s big banks are turning to Mortgage Company of Canada to secure a residential mortgage and make their dreams of home ownership a reality. That’s because the strict lending rules, like the stress test, only apply to federally regulated institutions. Mortgage Investment Corporations do not have to comply with these federal rules.

Accredited investors are also learning the benefits of investing in mortgages secured by residential real estate.

Mortgage Company of Canada has a diversified pool of mortgages secured by residential real estate in the GTA and Golden Horseshoe. Because of our careful lending process, qualified investors in Mortgage Company of Canada have enjoyed above-average yields.

In March 2019, Mortgage Company of Canada investors realized a tailing 12-month yield of 9.65%, with distributions paid monthly. This beats our own aggressive annual in-house target yield of 9.25%.2

Investors have been able to enjoy consistently high returns because Mortgage Company of Canada provides them with an attractive risk-adjusted return by investing in mortgages secured by single family homes in the GTA.

If you invested $100,000 with Mortgage Company of Canada in 2009, in March 2019, that equity would be worth $269,273.

Our diversified mortgage pool is made up of 770 mortgages with a total portfolio valued at $246 million.

Thanks to the resilient real estate market in the GTA and Golden Horseshoe, our portfolio has increased by 66% over the last 12 months.

Of that total, 81% of these residential mortgages are located in the GTA; 11% are in the Golden Horseshoe, 5% are in major urban centers, and 3% are in Ottawa. More than three quarters (76%) of our portfolio is made up of first mortgages; the remainder (24%) is made up of second and third mortgages.

Overall, 63% of our mortgages secured by residential real estate mature in six months; 100% mature in less than one year.

Mortgage Company of Canada’s long-term success can be attributed in large part to its management team. With a combined 45+ years’ experience in real estate, the risk market, and public market, Mortgage Company of Canada is helmed by one of the most knowledgeable management teams in the MIC industry.

On top of that, Mortgage Company of Canada is overseen by an independent board-approved credit policy, something unique to the entire MIC industry. It also follows a stringent underwriting analysis and leverages its third-party mortgage brokerage relationships as well as affiliated mortgage brokerage for quality mortgage originations.

Further, management and the Board of Directors have invested approximately $10.8 million in Mortgage Company of Canada, on the same terms as our investors, ensuring our investments are aligned.

To find out more, please contact Mortgage Company of Canada, visit our web site, or call 1-866-318-7222.

Sources:

  1. “Stress test responsible for drop of as much as $15-billion in new mortgages, study finds,” The Globe and Mail, April 16, 2019; https://www.theglobeandmail.com/business/article-stress-test-responsible-for-drop-of-as-much-as-15-billion-in-new/.
  2. “March Newsletter,” Mortgage Company of Canada web site, last accessed April 17, 2019; https://www.mcoci.com/wp-content/uploads/2019/04/Mortgage-Company-of-Canada-%E2%80%93-March-2019-Newsletter.pdf.

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