If you stay with the same lender, then yes, you would be on a 20yr amortization. I didn’t mention that before. I couldn’t edit my post afterwards, so I should clarify that the scenario above is a worst case, if you were to re-finance with a 25yr amortization again to illustrate the difference in the payment.

This is what could happen if someone felt they couldn’t renew with the same institution under a 20yr amortization. It isn’t advisable to refinance again for 25yrs, since you end up paying way more interest, but in a pinch it is possible and far better of an option than being forced to sell. You can always re-calculate payments to a shorter amortization schedule later during your mortgage term, if funds are more available (as long as the lender’s terms allow for this).

No, don’t you get it? You KEEP re-amortizing at 25 years, and NEVER pay off the mortgage. It’s how fuzzy logic works. It’s like increasing the amortization period to continue lowering the monthly payment. The stress test at the original amount today over 25 years gives $2326 monthly, just over the payment for the 20 year amortization at the new principle. Strange how math works. The higher rate now at 25 years equals almost the same monthly payments as the higher rate in five years at 20 year amortization.

Making current decisions based on future assumptions based on previous performance. Wage increases have been going at the rate of inflation. If all of the wage increase goes to paying off the higher interest rate, something ELSE has to get cut back.

Hey, Al, don’t forget to throw in oil prices, the Vietnam War, Reganomics, the Space Shuttle, the jet stream, El Nino, and the cost of potatoes in Ireland.

Oh, and the butterfly flapping its wings.

The 80s saw double-digit hyper-inflation, double digit mortgage rates and some pre-construction real estate was changing hands on multiple assignments like they were hot potatoes. What we see today is nothing like that environment.

What we have today:
2% inflation rate
3.x% interest rate
Nowadays an assignment can be done once IF allowed in the original agreement
Real demand via Millennials coming into their working years (did you know Millennials are a larger population than Boomers?)
Shortage of purpose built rental buildings (which is why investment properties are not the horrible phenomenon some would have you believe)
Strong desire for ownership vs. rental (values seemingly instilled into Canadians… by Boomers perhaps due to their success with real estate?)

The opportunity for a U.S. style correction was there in 2009, but it just didn’t happen. There were other factors keeping CDN real estate from tanking. I would even dare say that Trump helped us along at the start of 2017 with his political antics! If I was a foreigner looking to move to N.A., what would I have preferred? Canada, no question!

The key issue that has bothered a lot of people about the stress test is that the +2% calculation assumes your mortgage amount would be the same today as it would at the end of a typical 5yr term. Let’s look at an entry level $500K purchase:

$500K purchase
$100K (20%) downpayment
$400K mortgage

In December when people were trying to beat the stress test, a 5yr fixed I obtained for an investment property was at 3.04% from RBC, so we will use this figure even though sub 3% rates could have been obtained.

Based on the above, the monthly mortgage payment is $1901.20 (25yr amortization, monthly payments with no annual pre-payments).

The remaining principal amount at end of 5 years is $342,160.82 (slightly over half of your mortgage goes to principal repayment), assuming no lump sum prepayments were made.

Now applying the stress test at 2% higher rates in 5 years from December 2017, the mortgage renewal would have payments of $1,997.82. If the buyer cannot handle the additional $96.62/month, then they should be failing the stress test.

INSTEAD, the initial principal amount is used and the monthly payment used for the stress test is now $2,335.54 (17% higher than the proper 5yr re-finance calculation). You can see how the way the stress test was structured penalizes today’s buyer tremendously due to not factoring in any principal payment in their initial 5 year term.

I have been hearing from the buyers that we are working with that they feel they can easily afford more than the post-stress test amounts and don’t understand why the new pre-qualification numbers are so “unrealistically low”. This will push buyers to institutions who are not required to perform a stress test, thus leading to potentially sub-optimal mortgage terms paying more interest than they would have needed to just to qualify for the amount they know they can afford.

Sounds like a vicious trap, doesn’t it?

Or, this is not like 2008-09 at all, but more like the 80-90’s, when the market started to go down, then went down, then went down even further, then continued to fall. Finally, it fell some more. And then kept falling, so it wasn’t yet ‘finally’ at all.

If all these people are jumping in to avoid the new stress test, that implies they will not expect to pass it.

If they are not expected to pass a test that was put in place for their own protection, it would seem to me that they are all rushing like crazy to jump over the cliff before they put the fence up.

How many more rate increases like we had today before they realize they are no longer running, they are falling, because there is no ground under their feet?

Or were they running, not to beat the stress test, but to lock in a five year mortgage before the rates went up?

Maybe they COULD pass the stress test, they just didn’t WANT to.

Or they could pass the stress test at December’s rates, but they would fail it when the rates go higher?

When there is a lot of negative media surrounding real estate, some people give in to panic selling. This was the case in November 2008-January 2009. Those who had the stomach to jump into buying mode made off with some great deals and subsequent gains. By February 2009, the first sign of a rebound started showing when houses were getting 2 or 3 offers at a time without a specific bid date. Effectively, those looking for a pull-back felt that 5-10% was enough to get into the market. By May-June 2009, that reduction was erased. In looking back at history, there has been rubber band effects after every correction. The fact

Fast forward to today and we have a much stronger global and domestic economy (hence the justification for higher interest rates today) and prices have pulled back from their April/May 2017 peaks. Many buyers are frozen in “wait and see” mode much like in early 2009, which means those who have the means and stomach to get into the market for freehold housing just might actually get what they want AND negotiate a fair price for it without the need to throw every cent they have at the seller.

As an aside, comparing to this time last year is going to call for doom and gloom. I think the media as a whole will paint a “sky is falling” picture for the next 4 months because they focus too much on year over year numbers and not on longer term trends or recognize when rebound effects are taking place until it is too late. If you read about it the news, then you have already missed the opportunity the current market presents itself.