rates
THOUGH HIGHER RATES ARE HERE, THE STRESS TEST SHOULD ALLAY SOME FEAR As higher fixed mortgage rates have come to dominate the borrowing landscape, mortgage renewers are facing elevated costs. To what end should we worry?
Oh come on, admit it: at some point in time you’ve frowned, shaken your head, and muttered to yourself: “stupid stress test”. In our previously-stable, pre-pandemic economy, the mortgage stress test—whereby new borrowers or those re-financing were qualified for their mortgage using either an elevated benchmark interest rate or one that was two percentage points higher than their would-be contract rate, whichever was higher—seemed overly-burdensome. However, with fixed five-year mortgage rates having recently risen by 2-3 percentage points, the application of the stress test five years ago shows that the majority of households
renewing today are able to afford their (more expensive) mortgages.
As an example, a household renewing today at 4.24% would be concluding a contract with a rate of 2.24%; as they would have been stress-tested five years ago at 2.24% + 2%, in this scenario the new rate is affordable, all else being equal (including ignoring the fact that household incomes rose over the past years). Looking ahead, higher rates will be painful for some, but with stress-tested rates rising up to 5% for renewing borrowers, that oft-maligned risk mitigation tool seems to be doing its job.
READY TO RENEW, BUT AT WHAT COST?
6.0%
TODAY
5.0%
projected rate
4.0%
3.0%
2.0%
projected rate change
1.0%
stress-tested at 4.24% 2.24% ORIGINATING RATE 4.24% RENEWAL RATE renewal - originating rate=2.00%
0.0%
-1.0%
-2.0%
RENEWAL
ORIGIN.
RENEWAL DIFFERENTIAL
ORIGINATING RATE ADJ. FOR STRESS TEST
RENEWING IN...
ORIGINATING IN...
SOURCE: RATEHUB DATA: AVERAGE DISCOUNTED 5-YEAR FIXED RATES, MONTHLY, CANADA
22
rennie.com
Made with FlippingBook - professional solution for displaying marketing and sales documents online