A new report by CIBC suggests the mortgage stress test is leading more people to look to the alternative lending market to get financing for their homes.
The report confirms what some in the industry, including North East Mortgages president Terry Kilakos, have been reporting for months, most recently in an interview with Montreal’s Global News and in a commentary pieced published in The Suburban newspaper.
Benjamin Tal, CIBC’s deputy chief economist for world markets, told the Financial Post the percentage of real estate transactions done through alternative lenders is now up to 12%, an increase of 2 percentage points from 10%. In Toronto the number of transactions using alternative lenders is 15%.
Tal said one of the reasons for the increase is the stress test imposed by the government.
“Behind the scenes, there is a transfer of risk from the regulated to the less regulated segment of the market—from where there is light to where it’s dark. That was certainly not the intent of B-20, and any other mortgage-related change to regulations,” he told the FP.
Tal said the stress test was a way for the government to “save some Canadian borrowers from themselves” when interest rates were lower. The test makes sure borrowers can handle a rate increase of 2 percentage points—or 200 basis points—to the rate they have signed on for. It was introduced in large part to cool off the housing markets in the overheated markets of Toronto and Vancouver.
Tal told the FP the government should consider adjusting the number now that there’s been an increase in rates.
“But is 200 basis points the right number?” he asked. “At the end of the day, there is no real science behind that number.”
The economist also said the stress test doesn’t take into account that over the life of a mortgage, a borrower’s income is likely to increase. The stress test doesn’t take the decreased risk that comes along with a lower term, he said to the FP.