What Happens If We Cancel The Mortgage Stress Test?

[00:00:00] Welcome to The Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio. Welcome back Canadian Real Estate Investors. Today we are diving into some massive news that could potentially reshape Canada's real estate market. The banking regulator, also known as OSFI, is considering throwing out the infamous mortgage stress test.

[00:00:30] But what does this really mean for investors, homebuyers and the entire Canadian housing market? In this episode, we are going to find out. We will break down everything you need to know about this potential game changing shift in Canadian mortgage regulations and how it could change the real estate market. So first we will talk about OSFI and the recent criticism that they have been getting around the pre-construction condo sector. Then we are going to introduce those proposed changes.

[00:01:00] And then we will take you through the fascinating history of why the stress test was implemented in the first place. And how it has been affecting real estate investors and homebuyers across the country. We will demystify terms like the minimum qualifying rate that has been keeping many Canadians from entering the housing market.

[00:01:19] And explain why that magical number of 450% loan to income ratio is so crucial in the regulators' new plans. Plus, we will explore what their alternative solution might look like and how it could impact your real estate investment strategy.

[00:01:41] So whether you are a seasoned investor, first time homebuyer or someone just interested in understanding Canada's complex real estate and finance landscape, this episode is packed with insights you won't want to miss. But before we jump in, make sure you subscribe to the show to stay updated on the latest developments in Canadian real estate. And check out realist.ca if you are looking to join our monthly investment group coaching, which is now available for $99 a month.

[00:02:08] Or attend one of our free monthly meetups or quarterly paid events, which are available in person and online. Yeah, some exciting news, Dan. The next meetup that you and I will be attending is in Edmonton. Super hot market right now. That is on April 8th at the Canadian Brewhouse. You can find all that information on real estate website or in the show notes. And just a reminder for anyone across the country or locally here in the GTHA.

[00:02:37] We've got an event on April 1st. Yes, April Fool's Day. It is no joke. UFT. It's all about navigating capital, how to get your real estate investments financed. So we actually have the chief economist from CMHC coming to do an opener speech for us, which is awesome. Josh Finley from Build Financial. Michelle Ferruja from Cognitive Capital. Max Goizman from P-Kill Capital. And Matt Gonzalez from Foremost Financial.

[00:03:05] So absolute rock star lineup on the panel that I'll be hosting. And Dan, you are also doing a presentation on vendor take back. So you will, I can guarantee it, know more about financing and real estate investments after attending this event. Yeah, I think pretty much any of the top ways to finance a deal in 2025 will be covered at this event. So, and it is available. There's online available as well if you can't make it if you're not from the GTA.

[00:03:30] We know we try not to be kind of the downtown Canada, Tony Toronto folks, but it's just the easiest way for us to fill a room is to host it there. So there's online tickets available as well. Anyway, let's get started with an article about this, Nick. Yeah. So from Western State News, bank regulator considers replacing mortgage stress test. The regulator is considering scrapping the stress test and tightening lending rules for banks instead. And we're just going to bounce back and forth from some commentary from these two articles here, Dan.

[00:04:00] So first quote I'm going to read is Canada's top banking regulators considering a new approach to mortgage risk management that could replace the current stress test with even stricter rules on banks. And we're going to be looking at how much these banks can lend to high risk borrowers. Almost sounds like maybe they ultimately determined that consumers weren't the problem after all. No.

[00:04:26] It says that the office of the superintendent of financial institutions or OSFI is evaluating whether to shift the responsibility from borrowers to lenders, meaning banks rather than the individuals would face tighter restrictions on issuing high risk mortgages. So a final decision is expected after a full year of assessment. So you'll probably recall we covered this 450% portfolio cap rule.

[00:04:53] And we actually had to release some changes on it or some clarification because we misinterpreted it the first time it came out. I thought it was 450% per borrower like across your portfolio, but it's actually across the bank's portfolio of loans. We'll talk more about it in the episode today. Yeah. And they put out a memo November 6th. You know, that one year assessment from my perspective seems to be really part of the issue from my perspective with OSFI.

[00:05:21] How can you really respond to risk in real time if you need like a full year to measure that risk? And think about how much has changed in the last year, right? Yeah. I mean, we always talk about one of the issues here, Dan, as being lagging data, right? And to make real-time decisions off lagging data. And as you just said, look at the crazy amount of change in the volatility that we've seen across every market, even in a matter of days and weeks. So a year, it just seems almost ridiculous. Yeah.

[00:05:51] I think, you know, bureaucratic process in Canada, like we're just so bogged down with bureaucracy. Like it's such a theme in Canadian real estate. You've got the same thing taking place with, you know, policymakers at municipal, provincial and federal level. Like we're about to go into another federal election, by the way. Apparently, Carney's going to call a snap election. It should be April 28th or May 5th. But the last election was an election that was fought on housing campaigns, right?

[00:06:20] And now here we are and we're four years later and we've got another basically housing-focused election and very little progress has been made. So that lagging impact, people are responding to the problems in incredibly slow fashion with an incredibly slow supply chain as well.

[00:06:36] Just like an easy illustration of this is look how slow they've been to comment on the pre-construction condo blanket appraisal stuff after many requests from people like myself and journalists that I work with. Big journalists, by the way. You know, Wall Street Journals, Reuters, Bloomberg, to my understanding, have all asked them about this. And the Globe and Mail ended up doing an article on it, which we're going to touch on very quickly just to kind of give you an illustration.

[00:07:03] It says Toronto buyers are left in the lurch as pre-construction condos now worth less than they paid. In the lurch. I don't really know what that means. In lurch, not the lurch. In lurch. Yeah. Okay. There we go. Well, look. That tall guy who groans from the Adams family. So, yeah. You don't want to be like that. You don't want to be feeling like that.

[00:07:25] So, the article goes on to say that OSFI faces criticism following a Globe and Mail article about its slow response to mortgage market risk, specifically regarding lenders issuing high-risk blanket mortgages. That just sounds scary right there. High-risk blanket mortgages on pre-construction properties. Yeah. It's blanket appraisals that are being used to value the mortgages. Yeah. Yeah.

[00:07:50] So, critics worry that OSFI's lengthy testing approach could let serious financial risks develop unchecked. And this delay adds to ongoing concerns about mortgage oversight as buyers report pressure to close on some of these properties that have been devalued in the tens, if not in the hundreds of thousands in some cases. Oh, yeah. I'd say like the average – like if you're 2021 vintage closings on Toronto pre-cons.

[00:08:18] I mean, we've done full episodes on this and be analyzing it. And I think I'm probably the most well-researched on sort of the risk. I imagine the banks probably have their own research on this as well that they don't put out publicly. But I think publicly probably putting out the most research on this. And let's just kind of go through it just quickly to summarize. So, lenders are issuing mortgages with a loan-to-value ratios that are probably over 100% on pre-construction properties that have declined in value. These mortgages started at 80% loan-to-purchase price. Okay.

[00:08:48] So, purchase price LTPP, not LTV. LTV is loan-to-value. But they become riskier and the LTV goes up as the value, the V, drops. The P, purchase price or PP doesn't change, right? This creates concerns about the insurability of these as well.

[00:09:09] You know, a lot of people have been asking, are these financial experts, media and affected borrowers have all raised alarms about whether or not these are going to be insured and sold in mortgage bonds. And OSFI is sort of facing criticism in regards to their slow response and not really commenting on this. Like the journalists that I've worked with on this story who have asked me about it, they've said, yeah, OSFI just hasn't commented.

[00:09:34] So, I think that this issue will only gain attention with broader discussions of replacing the stress test, you know, the bank oversight that we're going to talk about, the two articles that we're going to talk about today. If they're ignoring other risks like this one while trying to kind of play whack-a-mole with policy on other risks in the Canadian housing market. Whack-a-mole is fun at the carnival. It is not fun in the general Canadian economy here.

[00:10:00] Dan, the article you're referencing is that one from the Adams family, Toronto buyers left in lurch as pre-constructed condos now worth less than the original value. So, let's look at some of the key points from this article. Okay. They provide a case study. A guy purchased a $2.2 million pre-construction condo and lease side. Wow. But it was later appraised at only $1.6 million from 2.2 to 1.6 creating.

[00:10:30] Yeah. So, let's do the math on that. Had they lent on that? Had somebody lent at 80% of loan to purchase price? Okay. So, if the banks lent at 80% of 2.2, they would have lent $1.76 million. Okay. Now, if it's only appraised at $1.6 million, you can see the problem here. Now, you're at like 110% loan to value. Yeah. Not just that, but there's also a value gap of almost $600,000 there. Right?

[00:10:56] So, pre-construction condos across Toronto are being appraised anywhere between 10% and, in some cases, up to 30% below their original selling prices. This is a big problem. The scale of this problem is huge. And, you know, the expected completion of just under 31,000 condo units between Toronto and Hamilton in 2025. And that surpasses the 2024 record of just under 30,000.

[00:11:22] Now, lenders are providing mortgages based on current appraised values, not that original purchase price. So, what are your options if you are one of these people in this unfortunate situation? You're one of these buyers. Well, you can forfeit your deposits. You can seek additional financing to help bridge that gap, that 10% to 30% gap.

[00:11:47] Or, in some cases, you can accept developer-arranged financing solutions, like the one that we've mentioned with RBC's blanket appraisal. Now, what is this going to do to the overall market? Because the condo sector here in the GTHA is massive. We just went through a huge condo boom over the past decade plus. So, investors are leaving, not even just leaving, but fleeing the pre-construction market. Where there was once lineups to buy these things, there are now lineups out the door.

[00:12:16] This also puts downward pressure on prices overall. And rental units are operating at monthly losses. And you can see this in the rental market space here in the GTHA. There is a crazy amount of stuff listed for rent, but also for sale. And it's basically just, I'll take whatever I can get, is the attitude of a lot of these investors, unfortunately. Now, what caused all this? You may be wondering. Well, a few things. Aggressive interest rate hikes. I'm sure you remember those.

[00:12:44] Construction delays through COVID and supply chain issues. We've seen an overall market slowdown and then a decrease in demand. And, of course, a few other contributing factors. But last but not least, the stress test. Well, then I guess it would be appropriate for us to talk about the stress test. So, let's do it. It's kind of stressing me out talking about it, but let's just do it.

[00:13:10] So, the Office of the Superintendent of Financial Institutions, or OSFI, is evaluating whether or not to shift responsibility from borrowers to lenders, meaning banks rather than individuals, would face tighter restrictions on issuing high-risk mortgages. After a one-year test, and if the test functions as expected, Peter Routledge, the superintendent, anticipates it could serve as an alternative or a complement.

[00:13:36] So, they haven't decided whether or not they're scrapping the stress test or stacking them to the minimum qualifying rate, or MQR. He wrote, referring to the new loan-to-income ratio cap that took effect earlier this year, which we already have done a full episode on. He says, we will ensure any adjustments are done correctly after thorough testing. Hmm. Okay. Well, that's great to hear. But let's rewind a little bit here and get a little refresher on the stress test here.

[00:14:02] So, under Canada's current mortgage stress test, uninsured borrowers must qualify at either 5.25 or their current contract rate plus 2%, whichever one is higher. So, that's 5.25 or your mortgage rate or your contract rate plus 2%. Now, this ensures that homeowners can actually manage their payments if we were to see interest rate increases or just volatility in that market, which we have seen a lot of.

[00:14:30] Now, in October 2024, OSFI eased the stress test for borrowers, switching lenders. They can now bypass that test if they maintain their original loan amount, amortization period, and other key factors of that loan agreement. Now, OSFI is exploring an alternative approach rather than stress testing individual homebuyers. They may limit banks' ability to lend to heavily indebted borrowers. So, doing the old Kansas City shuffle here.

[00:15:00] So, let's break down how this stress test actually affects the borrowing power with a practical example here. So, let's say you have $100,000 annual income. At a 3% mortgage rate, your monthly payment capacity is about $2,500. So, your maximum mortgage amount would be about $525,000. But you don't have to qualify at a 3% mortgage rate. You have to qualify at a 5% mortgage rate, which is 3% plus the 2% stress test. And it's actually now a minimum of 5.25.

[00:15:30] So, the actual maximum mortgage allowed would be $450,000 rather than $525,000. So, your buying power is reduced significantly. At a 4% mortgage rate, your monthly payment capacity is still the same based on your income, right? $2,500 a month. But your maximum mortgage amount would be $485,000. But you have to qualify at a 6% rate. So, the actual maximum mortgage amount would be $415,000.

[00:15:57] So, this demonstrates how the stress test reduces borrowing power by approximately 15% to 20% regardless of the actual mortgage rate as buyers must qualify at a rate 2% higher than their contract rate or at a minimum of 5.25%. And this is assuming a 25-year end. Yeah. Yeah. Okay. That's great. Now, let's examine. Let's do another practical example here, Dan.

[00:16:19] But let's use an income property example to show how the stress test can prevent qualification even when a property has a good debt service coverage. Okay. So, property details here. Let's say purchase price of the property is $800,000. You need a 20% down payment. That's $160,000. Your mortgage amount required would be $640,000. And your monthly rental income is $4,000.

[00:16:47] So, at a 4% mortgage rate, your monthly mortgage payment would be $3,375. Your debt service coverage ratio is 1.18, which is generally considered pretty good. And your property is cash flow positive, $625 a month. Okay. So, that's not bad. At a 6% stress test rate, so that's that 4% plus that 2%, that 2% makes up the stress test, your monthly mortgage payment goes to $4,100.

[00:17:17] Your debt service coverage ratio drops from 1.18, which is in that good territory, to 0.97, which is in that not so good territory because it's below lender requirements. Your property cash flow actually becomes negative by $100 a month. So, that's a $725 difference rate there. And you likely won't qualify despite being profitable at actual market rates. Now, this demonstrates how the stress test can actually prevent investors from acquiring

[00:17:46] investment properties that would be profitable at current market rates simply because they don't pass qualification at those higher stress test rates. So, given that this means that there's a lot of investor capital that isn't able to be productive and buyers are probably having a harder time qualifying. And a lot of the risk of the stress test that the stress test was designed to eliminate has probably been realized at this point.

[00:18:12] The new system would shift focus from qualifying at a hypothetical interest rate to evaluating a borrower's total debt-to-income ratio. This shift could help stimulate residential investment, which has been declining as a component of GDP. By easing these qualification requirements while maintaining some risk controls, it could encourage more real estate investment activity, more buying activity, which I think is – I think policymakers are kind of at that point where they're like, hey, the economy is suffering.

[00:18:40] We got to start doing stuff to make it – they're kind of poking the little creature with a stick, right? Hey, move already. That little creature isn't a bear, is it? No, we're not poking the bear here. We're poking whatever creature represents the economy. Use your imagination. Okay, so Dan, let's go back to that GDP piece you just mentioned here, right? A lot of stuff about GDP in the news. Maybe we've been talking about GDP per capita since we started this show, but let's quantify that impact on GDP here a bit, okay?

[00:19:10] Assuming that the trend of declining housing starts and investments persisted into Q1 of this year with interest rates being cut and not reversing that decline, residential investment is likely down by approximately 20% to 30% in nominal terms since Q1 of 2022. Now, in real terms, accounting for inflation, which averaged about 3% or 4% annually, the decline would actually be closer to 25% to 30%, so it actually bumps it up a little bit.

[00:19:39] Now, we don't have precise Q1 data from 2025, obviously, because we are still in it. A conservative estimate based on available evidence that we've collected would suggest a drop around 25% in nominal investment value, which translates to a reduction of roughly $35 to $40 billion from the $153.8 billion peak in Q1 of 2022.

[00:20:06] That leaves investments at approximately $113 to $115 billion annually by this year. So, relieving some pressure on that buying power could be a move to get Canada's economy moving a bit more since we're going to desperately need that based on the current economic setup, which we're not going to try and dwell on too much right now, although we're talking a little bit about it at the end of the episode. So, how would you do that?

[00:20:32] Well, for investors specifically, moving away from the stress test could unlock significant purchasing power on potentially leading to increased residential construction. We know that most investors right now need to multiplex properties. They need to add units. They need to add value to make properties cash flow. And so, you see a little bit more renovation spending, a little bit more transaction volume. That makes up your residential investment, which is a key driver of GDP growth.

[00:20:59] However, the 15% quarterly cap on high loan-to-income mortgages suggests that OSFI is trying to balance both economic growth and systemic risk management. So, they're putting the risk management more on the banks than on us, the borrowers. Yeah. And their internal analysis revealed that despite the stress test, borrowers continued to take on substantial debt loads with many securing… Yeah, I know. Yeah. Oh, man. Surprise, surprise.

[00:21:29] Yeah. Well, I mean, Canadians are irresponsible, right? You give them a… Look at MLI, right? Look at CMHC MLI. It's like you give Canadians a good credit product and they're going to abuse it. I promise. I don't want to get too off topic here, but it's because there's not a ton of great opportunities right now in the overall economy that we, you know, there's one introduced and savvy people get a hold of it and start using it.

[00:21:56] And then eventually, you know, it becomes mainstream just like the MERB program back in the 70s or pre-construction, you know, over the last decade. I think we're witnessing MLI turning into another one of those programs, unfortunately. Yeah, it seems like it. There are definitely making efforts to scale it back. And actually, CMHC mentioned, I think, Aled, when we were chatting with him about his presentation, he said he wants to bring a couple of people from the product team to our Navigating Capital event.

[00:22:24] So, I guess they want to either ask some questions or engage with the audience or whatever. So, to their credit, they're trying really hard to figure out how to fit into the market properly without disrupting it. But I think it is, like, I will just say it's not, like, it's so easy for us and, like, you know, people on Twitter and whatever to be like, oh, this is a horrible idea or that's a horrible idea or do this or do that. But it's probably a lot more complicated than, you know, than we make it sound. Substantially more. Yes, we have the easy job.

[00:22:54] Yeah. So. Yeah. Okay. So, from that, I'm going to just read this piece here from OSPI. So, our analysis found that the minimum qualifying rate did not prevent a substantial accumulation of mortgages with extremely high loan-to-value income ratios exceeding 450%. That was from a memo. The loan-to-income test evaluates lenders' portfolios rather than imposing a requirement on individual borrowers.

[00:23:21] Now, in response to those statements, OSPI implemented a loan-to-income, an LTI cap. That was just this past January 31st of 2025. This new rule limits federally regulated lenders to issuing no more than 15% of their quarterly mortgage originations to borrowers whose mortgage debt surpasses that crazy number of 450% of their annual income.

[00:23:47] Now, OSPI is now evaluating whether this portfolio-level restriction on high-risk lending could serve as a complete replacement for the mortgage stress test. So, basically, in Rutledge's statement earlier in the episode, he said either replacement or compliment, right? So, I would say, you know, I think everybody in the industry is hoping that it'll end up

[00:24:12] being a replacement because, you know, you don't feel it as much as a consumer if the banks are forced to regulate their entire portfolio. You know, you will if you're the – and we'll get to this, but if you're one of the ones who wants that 450% plus mortgage. But they're going to make a final decision on this after year-end, as Routledge has mentioned. And borrowers have long been criticizing the stress test for limiting the affordability.

[00:24:41] But OSPI has repeatedly warned that removing it would create risk without providing an alternative and expose the banking system to major risks. And honestly, I'm inclined to agree with them. And I think that, you know, in line with what we were saying about Canadians wanting to abuse any credit product that comes our way and, you know, a couple of other things. I think that they – I think the stress test probably, it did a good job.

[00:25:07] Yeah, put those – you know, when you bowl with the little guardrails up on the sides. I feel like I kind of had that. Yeah. I mean, and look, Canada's housing market, Dan, we know this, right? It's experienced downturns linked to inadequate lending regulations in the past, right? Let's go back to 1982. Housing crash back then resulted in the failure of 36 federally insured loan and trust companies plus two banks. That was the Canadian Commercial Bank and the Northland Bank of Alberta.

[00:25:35] And that required a $1.3 billion insurance payout from government deposits. Now, former CMHC CEO Romy Bowers emphasized the need to prepare for worst-case scenarios. In 2017, she testified that CMHC's stress test, its insured portfolio against severe conditions. So, you know, that was their hedge.

[00:25:59] And a 30% national home price decline and an 11.5% employment rate levels not witnessed since the early – since the recession of the 1980s, which we just mentioned. Yeah. And the – Romy Bowers is qualified. She's at the IMF now, which is – Oh, wow. Okay. There you go. She says, I reference a 30% national house price decline. Canada has never experienced such a downturn, knock on wood, but we must prepare for potential risks.

[00:26:29] I honestly feel like peaks of trough – like from the peak, we're already down, I don't know, 18%, give or take. So, another 12%. Honestly, it doesn't feel that unlikely with these – like with this tariff setup, with the economic setup. I know I'm like – I've seen so many of these negative reviews, people always whining about how negative I am. I get it. I'm just like – it doesn't feel unfathomable that we could see a peak to trough decline, remembering that the peak was pretty nuts.

[00:26:57] Like probably 10% of that was just froth. So, anyway, the closest we got to that 30% was the 1990s downturn. And during that 1990s housing market downturn, Canada experienced another significant wave of financial institution failures. Several trust companies, including Central Guarantee Trust, that was when TD took over Canada Trust as well, I think. There was a lot of mergers and acquisitions. Some people speculate that it was the banks putting a hit on the trust companies. Honestly, because I guess – Love a good conspiracy. Why not, right?

[00:27:26] That's how the oligopoly happened. Yeah. But they fell into financial distress due to poor real estate lending practices and declining property values. Sound familiar? So, the failure of Central Guarantee Trust in 92 was particularly notable as it was one of Canada's largest trust companies at the time. The company had aggressively expanded its mortgage lending during the real estate boom of the 1980s, remembering that the last major cyclical peak was 1989. But when property values declined sharply in the early 1990s, it faced mounting losses from

[00:27:55] defaulted loans. We haven't seen that happen yet. Although, to be fair, Home Trust had a little bit of a shakeup in 2017 and Daddy Warren Buffett hopped in with a line of credit to fix that problem very quickly. These failures in the 90s led to further strengthening of financial regulations and lending practices in Canada, contributing to the development of the more stringent oversight framework that we're discussing, you know, additions to today.

[00:28:23] So, before we discuss those additions, let's take a little trip down memory lane, Dan. Let's look at the history of Canada's mortgage stress tests and kind of how it reflects Canada's evolving approach to both the housing market and kind of managing the housing market risks. So, 2016, all the way back then, you know, life was a lot simpler back then, I feel like. That was the initial implementation.

[00:28:52] The first version, 1.0, if you will, for insured mortgages. 2018, major expansion of the program extended to uninsured mortgages. That was the B20 guideline. 2020, hell of a year. Pandemic adjustments were introduced. Modifications, of course, during the COVID-19 pandemic. A lot changed back then. I know we probably suppressed that memory, a lot of us. 2021, further tightening. Increased the qualifying rate to 5.25%.

[00:29:22] Fast forward a couple of years. 2024, there was some strategic modification. It actually relaxed rules for switching lenders. And, of course, 2025, a new direction, the introduction of the LTI, the loan to income cap. So, let's think about how each of these has really impacted investors along the way. So, because, you know, you and I have both been trading and investing in the market since these changes started.

[00:29:50] 2016, it was the initial implementation. The first version was introduced for insured mortgages only. So, for those with down payments, less than 20%. Borrowers had to qualify at the Bank of Canada's five-year posted rate, even if they could secure a lower rate, which they certainly could during that market. This was basically only for owner-occupiers and, in many cases, first-time homebuyers.

[00:30:10] So, it had very little impact on investors other than limiting the demand for properties by reducing the purchasing power of any owner-occupied buyers or first-time homebuyers that an investor might be selling their property to. Okay. So, that's 2016. Let's go to that major expansion in 2018 where they extended the stress test to uninsured mortgages. Those are those with a down payment of 20% or more. Now, this was called the B20 guideline.

[00:30:35] It required borrowers to qualify either 2% above their contract rate or the contract rate of the bank, the five-year benchmark, whichever one was higher, right? We talked about this at the top of the episode. Now, this had several impacts on real estate investors. For a lot of them, it reduced purchasing power. Many buyers had to scale back their acquisition plans, yet also limited portfolio growth.

[00:30:58] Investors with multiple properties found it harder to expand their portfolios due to these stricter qualifying criterias. Some investors even turned to alternative lending or private financing to kind of circumvent the stress test. Others focused on joint venture partnerships or combined incomes to qualify for larger mortgages, which we saw a lot of people teaming up in JVs. Many just shifted their strategy to focus on cheaper property markets, right?

[00:31:28] That's where we saw that huge outflow of capital from the Vancouver's and Toronto's of the world here to places like Edmonton, places like Winnipeg. And also, from our example earlier, Dan, I think it makes it pretty clear that it had a major impact on cash flow. Properties that were previously borderline cash flow positive became way more challenging to finance, which led some investors to require and being forced to put down larger down payments.

[00:31:57] So, it really had an impact on how investors structured their real estate deals and the strategies they implemented in their portfolios after that. And then we started to see some adjustments from once the pandemic onset happened. So, 2020, the stress test remained in place, but the qualifying rate was adjusted several times in response to market conditions and historically low interest rates.

[00:32:20] Further tightening in 2021, where they raised the minimum qualifying rate for uninsured mortgages to 5.25% or 2% above the contract rate, whichever one was higher. And this change was implemented to address housing market risks that were kind of going crazy back in 2021. In 2024, there were some strategic modifications. They relaxed the stress test for borrowers switching lenders, allowing them to bypass it when maintaining their original loan terms.

[00:32:48] This change aimed to promote more competition while maintaining market stability. So, there's no really new risk being introduced to the market because those loans are already going to be renewed.

[00:33:01] But it allows people to basically switch from an RBC to a BMO or TD to a Scotia without having to do a stress test because if they wanted to switch, then all of a sudden, the lender that they're switching to can't be as competitive because they have to qualify 2% higher. So, the modification did have some impacts for real estate investors.

[00:33:25] It probably increased flexibility on refinances, which is going to be a super key thing given that we have a record number of mortgages renewing in 2025 and 2026. So, investors can more easily shop for better rates without having to re-qualify under the stress test. It allows you some portfolio management benefits. You can optimize existing mortgages across multiple properties, maybe get some blanket policies. The ability to take advantage of competitive rates without additional qualifying hurdles.

[00:33:52] Reduce friction when transferring mortgages between lenders. Cost-saving opportunities. You know, negotiating terms as mentioned. Reducing financing costs due to simplified qualification process, which is a big thing, right? Like, if all of a sudden, you're, you know, anybody who's kind of done the project management of renewing mortgages, closing on properties, etc. It's not an easy process per se. Particularly benefits investors with multiple properties are those trying to scale by making it easier to optimize their existing mortgage arrangements,

[00:34:20] which is going to be a big theme is shoring up cash or reducing your cash flow or sorry, reducing your monthly mortgage payments to increase your cash flow in today's market. I think that's the best way to kind of get a bit defensive against a recession while also giving yourself a bit of opportunity moving forward. Yeah, yeah. Great points. Okay. Final piece of our history lesson here. 2025, a new direction. So this is where we, this is what we've been talking about, right?

[00:34:44] The introduction of that LTI cap, the loan to income, which limits lenders to issuing no more than 15% of their quarterly mortgages to borrowers, exceeding that 450% of the debt to income ratio. Now, obviously, we can't considering this portfolio level approach as potential replacement for the traditional and the original stress test that we just covered the history of. Now, Dan, talk to me about this 450% number here.

[00:35:11] So the 450% portfolio stress test introduced in January 2025 marks a significant shift in how Ausfee regulates mortgage lending. So here's what has changed. Banks can now only issue up to a certain percentage of their quarterly mortgages to borrowers whose mortgage debt exceeds 450% of the annual income. Instead of testing individual borrowers, the regulation now targets the overall risk level in a bank's lending portfolio. This forces banks to be more selective with high ratio loans.

[00:35:40] So remember how we've been telling you to build good relationships with your lenders over the years. That's where this might come in handy. Creates a natural competition for the limited high ratio lending allocation. It might lead to stricter internal banking policies for high ratio mortgages. You might not notice that so much. It would reduce access to high ratio mortgages for some borrowers, especially the ones who have a really high percentage that could skew the portfolio average for the bank.

[00:36:05] And so maybe those people who do have that really high percentage might have to go to multiple lenders, kind of spread the risk out across all those books. There's a greater emphasis on debt to income ratios in lending decisions. I would say it's a shift more towards more fundamentals, you know, typical borrow qualification to institutional portfolio management kind of thinking, I would say. More like big finance thinking, but it could also, you know, replace or remove the potential stress test.

[00:36:35] And I do think that that's their intended outcome with this policy. Like I think that their goal is to eventually have this, remove the risk so that they can get rid of the stress test so that Canadians can start to afford to buy houses again, not have to be up against that. Yeah, that last little barrier there. Okay, so if you're listening to the show, you either are a real estate investor or would like to become one. So let's talk about the impact this may have on real estate investors.

[00:37:01] Well, if you are an investor with multiple properties, you may face scrutiny with your if your total mortgage debt exceeds 450% of your income because banks need to cap their entire loan book now below that 450% mark. And banks will need to start becoming more selective about which high ratio mortgages they approve because they only have 15% allocation at this point.

[00:37:24] Now, this may cause you to adjust your investment thesis, your investment strategy, because you may need larger down payments to keep those loan to income ratios below that 450. This might result in more joint venture partnerships or combined income applications and really reiterates the importance of cash flowing properties versus that appreciation dependent investments, right?

[00:37:50] You know, Toronto being a more appreciation market, Edmonton being a more cash flow market, for instance. This also increases the opportunities in like the private lending and the alternative capital space and potentially would put pressure on some investor heavy markets and would definitely create opportunities for investors with strong income to debt ratio. So if that sounds like you, this could present a pretty big opportunity.

[00:38:17] Now, Dan, let's get back to that 450 with a practical example here. Yeah. Yeah. So each institution has to manage a portion of the newly originated loans in their mortgage portfolio that exceed that 4.5x loan to income multiple. And there was originally one that had like a 4.5x portfolio level restriction, which we can illustrate with a simple example. So imagine a bank has just two mortgages in their portfolio, my mortgage and your mortgage, Nick. We both make $100,000.

[00:38:46] My mortgage is $550,000, which is a loan to income ratio of 5.5x, but you're much more responsible. Your mortgage is only $150,000 or a 1.5x income. In this simplified example, the bank's portfolio average would be 350%, which is below that 450% portfolio threshold that was introduced in the last episode that we did about this.

[00:39:07] If they issue 1,000 new mortgages a quarter, only 150 of them can have loan to income ratios above 450%. So they're going to carefully manage which high ratio mortgages they approved to stay within the limit. Borrowers with high loan to income ratios might face more competition for the limited allocation of high ratio mortgages. So if you are highly levered relative to income, again, it's not really – it doesn't matter relative to value, etc.

[00:39:36] That's kind of a different underwriting category. Relative to your income, this might be one of those periods of time where you either want to show more income or have more income coming from your properties, etc. To try and offset some of the risk of banks not wanting you to be on their books because of that issue. Yeah. By the way, if you're not trying to figure out ways to get more money out of your property all the time, that's something you should be doing. Well, I think there's a big issue with – a lot of people are incentivized to write down their incomes.

[00:40:04] Like our tax – people pay a lot of income tax here, right? And so you get a lot of self-employed people who can sort of determine what their income looks like at the end of any given year. And I think – I would say you see a lot of Canadian entrepreneurs who are facing that decision of do I want to pay a lot of tax or do I want to be able to qualify for a good mortgage? And I think that this is going to change some of that. So the government might actually almost ultimately end up with this creating a bit of a tax income advantage for them as well as people.

[00:40:34] You know what I mean? Yeah. Yeah. Okay. We are going to change gears here for just a quick second. I'm going to sneak in a little piece here on tariffs and the trade war because it wouldn't be a Q1 2025 episode if we didn't have something related to that. Now, we do relate this back to the stress test. So keep listening if you're like, I don't want to hear any more about this. This comes back around. Now, Dan, this started with a tweet from Ron Butler, fellow podcaster and mortgage agent.

[00:41:01] And he writes, breaking one of the big six banks advises their mortgage approval process for steel and aluminum workers is now restrictive. I won't name the bank and the details aren't very clear yet, but it's out there now. You can shout elbows up as much as you want, but ordinary people are still getting harmed. What does he mean by that? What is he talking about? Yeah.

[00:41:26] So what Ron is highlighting here is a concerning trend where specific industries and their workers are facing additional lending scrutiny or restrictions on their mortgage approvals. And there's a lender basically who has put out this restrictive policy for steel and aluminum workers because of its tariff risk. And the list actually has a bit more – I'll go through the list of the limited appetite jobs.

[00:41:52] But basically, Ron mentions that this is a continuation of practices seen during the COVID-19 pandemic when banks frequently tighten lending criteria for certain sectors due to economic uncertainty. That's so fun. Yeah. And the limited – so the brief from said bank is that the tariffs between Canada and the United States in consideration to the turbulent economic landscape, they've changed their risk appetite for tariff impacted industries.

[00:42:18] And so what they've done is the steel and aluminum industry are being added to the existing limited appetite treatment list. And so the limited appetite treatment list, you'll see a bunch of other ones that are on there from COVID prior. TDS rate for the limited appetite industries will be reduced from 44% to 42% and a GDS maximum rate of 39% will now apply. And at least one borrower must have a minimum credit score of 750.

[00:42:46] So what is this – what's the list? Let's get to the list. Limited appetite jobs, construction, transportation, leisure and entertainment, retail sales, banking, finance, manufacturing, farming, natural resources, wholesale trade, utilities, and steel and aluminum, which is a new addition to that. Now, I would say – Am I missing something? What is not on this list? Yeah, yeah. That seems like almost every freaking job I can imagine. I mean, I think, hey, man, that's capital contraction, right?

[00:43:12] That's when the banks are saying, hey, we don't want to – you know, we consider lower appetite for loans of pretty much every job in the market. Yeah, like what – I mean, why not just say every job in the market instead of having to pinpoint every single one? Yeah, yeah, yeah, really. Now, I guess you can expect more of this, right, as kind of the economy becomes, unfortunately, less certain, right? I was just checking the fear and greed index the other day, Dan, and we are in like extreme fear and have kind of been bouncing back fear and extreme fear.

[00:43:43] Now, of course, that's an indicator of the stock market but provides overall – a glimpse into the overall sentiment. Now, banks are in scenarios like this actively restricting credit access to specific industry workers, right, removing a portion of those potential borrowers from the market entirely. And by the sound of that list, it sounds like they've removed the entire market entirely. You know, obviously, it's an exaggeration but it's going to lead to fewer qualified buyers. Reduced demand, of course, can impact property values, which we've seen in the condo space.

[00:44:12] Lowered property values can further tighten lending criteria, which can then have a systematic impact. When major lenders restrict lending to certain sectors and those sectors suffer. Now, again, this may be a great space for the alternative lending community to pick up the slack. But, you know, it really comes back to that sentiment in psychology. And as the resident optimist of the group here, it's tough, right?

[00:44:37] I mean, this creates uncertainty in those affected sectors, some of which, you know, are already hurting, like construction. I know the transportation industry is a bit of a mess right now here in Canada. That affects consumer confidence, which is like the most important. That's the invisible hand that guides the economy. And I can tell you firsthand, it is affecting potential buyers to delay purchase or even shell projects, right? So none of this is good. I'm trying to find something like nice to finish it off with here.

[00:45:06] But it's, you know, I guess we got to get through this hard stuff before the good stuff happens. And within some of this hard stuff, this is where a lot of opportunities can present themselves. I think that's the silver lining. Exactly. No matter where you are, who you are, what market or what your financial situation is right now, you know, there are ways to come out of this better than we are right now. For sure.

[00:45:33] So the evolution of Canada's mortgage stress test and potential shift to these portfolio level restrictions represents a significant change in how Canada regulates housing market risk. It could ultimately result in the removal of the stress test. We just have to wait a year to find out. But I will be biting my fingernails the entire year on the edge of my seat. Guess we're doing another episode in a year from now, eh? So as these changes continue to unfold, it is crucial for real estate investors and homebuyers to stay informed and adapt their strategies accordingly.

[00:46:01] If you want to do that, you want to learn more about navigating these changes and connecting with like-minded investors, visit realist.ca to attend a free educational event on Canadian real estate investing, to attend a free monthly meetup with other Canadian real estate investors, to join our growing online community of informed investors, and access expert insights on market changes and regulatory updates from myself and Nick. You don't have to navigate these changes alone.

[00:46:30] So become part of the community that helps you make informed investment decisions in Canadian real estate and the evolving real estate market in Canada. Damn, that was a good pitch, man. I like it. I mean, if I wasn't directly involved, I would 100% join after that. One final thing here, everybody. Thank you so much for listening. As always, we know we've had a lot of new listeners to the show. We greatly appreciate you. Wherever you are listening to us from, go back,

[00:46:55] do yourself a favor and listen to some of the episodes from a year or two, almost three years ago now. A lot of them are evergreen episodes, which means they are still relevant to today, tomorrow, next year, whatever. We talk about strategies, talk terms. And one final reminder, Edmonton. We will see you soon, April 8th. Dan and I are excited to get out there. If you are a real estate investor in Edmonton and have a really cool project you want to show us, book a time with us that day. Reach out.

[00:47:24] We have limited time, but would love to spend some time out there with investors doing cool things. Until next time, thanks for listening. We'll see you soon. The content of this podcast is for educational and informational purposes only. It is not intended as financial, legal, or investment advice. Always consult a qualified professional for advice tailored to your unique circumstances. The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations.

[00:47:52] Daniel Foch is a real estate broker licensed with Valerie Real Estate Inc. Website is Valerie.ca, V-A-L-E-R-Y.ca. And a member of the Canadian Real Estate Association, the Ontario Real Estate Association, and the Toronto Real Estate Board. Nick Hill is a mortgage agent and partner at OWL Mortgage. License number 10317. Agent license M21004037.