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Impacts of the Stress Test on Project Financing

November 16, 2021

The recent change to the mortgage “stress test” is designed to ensure that the purchaser can afford their home if rates rise, and that Lenders will not have increase in defaults. But what are the impacts to buyers and developers?

On June 1, 2021, the federal government raised the level of the mortgage stress test, making it harder for buyers to qualify for a home loan. Designed to cool down a hot housing market, the stress test requires buyers to prove they can make mortgage payments at an interest rate of 5.25%, regardless of how low their mortgage rate actually is.

While the intent is to ultimately protect the Canadian housing market, what does the stress test mean for buyers – and developers building homes for prospective homeowners? Here are some of the potential impacts:

Purchasing power is reduced

By requiring homebuyers to qualify at a higher rate, the stress test means buyers either have to come up with a higher down payment or settle for a lower priced home. Reducing buyers’ purchasing power applies downward pressure on prices in all tiers in the market.

Slower absorption rate

If end housing prices are not adjusted, projects may take longer to sell, which could lead to increased project interest costs and consequently could affect the launch of new phases or loan repayment.

Erosion of profitability

If end house prices are forced downward, profitability could be eroded across existing projects. While lower purchase prices may benefit the consumer as new projects are being built, the project economics could suffer without a reduction in costs, potentially limiting the supply of new homes.

Potential boost in rental market

If purchases are unable to meet the new stress test levels, the rental market may benefit, potentially boosting the demand for multi-unit housing.

How MCAP can help

As Canada’s largest mortgage finance company, MCAP is in a position to offer higher loan-to-costs financing compared to traditional banks, which reduces a Borrower’s (Developers) cash investment into a project. We also provide inventory loans on completed and unsold units. The result is that borrowers can retain more capital on their balance sheet to start new projects, manage other issues (such as slow sales) and even improve their return on equity.

What’s more, MCAP provides rental construction loans at higher loan-to-costs than traditional banks. Should builders wish to capitalize on the potential boom in rental housing, MCAP is here with the right financing solutions to help achieve evolving development objectives.