Gunning for an easier mortgage stress test? It may not take long

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This time last year, few could have imagined mortgage rates would rocket 400 basis points in just 10 months. But our banking regulator knew it was possible, and that’s partly why it forces mortgage shoppers to prove they can afford rates at least 200 bps higher than their actual rate.

(One basis point is one-hundredth of a percentage point.)

It’s a policy that’s saved a not-insignificant number of homeowners from financial ruin. The Office of the Superintendent of Financial Institutions therefore decided on Thursday not to fix what wasn’t broken. It left its mortgage stress test – which ensures borrowers can afford a payment at the greater of 5.25 per cent or their actual rate plus 200 bps – as is.

Some in the housing and mortgage sector argued that high interest rates have peaked, and therefore OSFI should relax its stress test to prevent a housing crash.

But the banking regulator wasn’t swayed. It said last week that it’s not in the rate prediction business, and rightly so. As the Bank of Canada proved with its famous 2020 statement – “We’re going to hold our policy interest rate at the effective lower bound … until sometime in 2023″ – the most informed experts are in the dark when it comes to long-term rate forecasts.

If you’re gunning for an easier stress test, however, there’s hope on the horizon. The silver lining of recessions is that they drive bond yields lower. That in turn pulls fixed rates – and ultimately prime rate – lower.

This week’s lowest fixed and variable mortgage rates in Canada

Once that happens, the stress test could get significantly easier. The lowest nationally advertised uninsured mortgage rate of 5.24 per cent would be stress-tested at 7.24 per cent. If the current lowest rate fell at least 199 bps – to 3.25 per cent – it would then be stress tested at the minimum qualifying rate of 5.25 per cent.

Whether this easing happens in three, 12 or 24 months is anyone’s guess. But if inflation subsides in the first half of 2023 as economists predict, the stress test could ease sooner than later.

A 200-bps rate drop would mean party time again for housing bulls. For every 100 bps that the stress test eases, mortgage buying power increases about 9 per cent.

That means when rates get back below average, homebuyers could enjoy up to 18 per cent more buying power.

The see-saw with rates on one end and home values on the other would then tilt in homeowners’ favour. Would-be first-time buyers, however, would see worsening affordability again, the same old challenge they’ve faced for years. Except this time most would have more income to qualify for their mortgage, thanks to inflation-driven wage gains.

That’s exactly why many first-time buyers may jump at the chance to buy this spring – and why home prices may find a floor in the not-too-distant future.

A way to get an uninsured mortgage with 5 per cent down

Canada’s renter population has grown at three times the rate of the country’s homeowners in the past decade. Many of these renters want to buy but they can’t beat the insured-mortgage stress test and/or come up with the minimum 20 per cent down payment for an uninsured mortgage.

Ourboro Inc. thinks it has an answer. It’s basically an investor in your property that provides up to three-quarters of a 20 per cent down payment. If your home appreciates, it then takes a proportionate share of the profits based on its percentage of the down payment.

Here’s a simple example:

Say you buy a $1-million home with $50,000 down. Ourboro can put up the other $150,000 for the required 20 per cent. If the property climbs in value to $1.2-million and you sell, Ourboro gets back its original down payment ($150,000) plus 75 per cent of the profit (in this case, $150,000).

Ourboro promotes several benefits to qualified buyers:

1. They can buy virtually any home between $550,000 and $2.5-million with only 5 to 10 per cent down.
2. Borrowers can qualify for bigger mortgage amounts.
3. No interest is paid on Ourboro’s down payment portion.
4. Ourboro’s investment is payment-free and there is no mortgage registered on title.
5. Ourboro pays its share of the land transfer tax when you buy.
6. The company charges no fees.
7. Ourboro shares proportionately in your losses if your home value drops before you sell.
8. Because the mortgage is uninsured, the borrower saves default insurance fees, which amount to $20,800 to $37,000 depending on the purchase price, plus provincial tax and interest on the fee.

Whether No. 1 and No. 2 are wise is the borrower’s call, and depends on their financial circumstances.

One thing you should be aware of is that Ourboro’s cut of any profits is calculated before you pay realtor commissions for selling. In other words, the homeowners pay the realtor fees.

Ourboro invests up to $250,000 per property and homeowners can pay it out at any time between purchase and sale. But, it has to be all or none. You can’t pay Ourboro off in chunks. The minimum household income is $65,000 and the minimum effective credit score is 600.

As for lender options, they’re a little sparse. According to its website, Canadian Imperial Bank of Commerce is currently the only lender Ourboro works with for prime mortgages. The company is in talks with a number of other lenders. For non-prime mortgages, it’s partnered with Equitable Bank and mortgage brokers.

Gary Fooks, co-founder and chief executive officer of 8Twelve Mortgage Corp., is one of those brokers. Since 31 per cent of Canadians do not have a ”bank of mom and dad” and require additional help with the down payment, “I expect this type of ownership structure to gain a lot of traction over the coming years,” he said.

I have little doubt he’s right. So much so that I wonder whether Ourboro will run out of money. The company has Peerage Realty Partners – which has stakes in major developers and firms such as Sotheby’s International Realty – as a key investor. It also takes funds from accredited investors and is reportedly working to raise a significant institutional block of capital.

Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.