Mortgage Stress Test: Benefits to Canadian Debt Management

In January, a new mortgage stress test was put in place requiring Canadian home buyers to qualify at rates higher than the benchmark interest rates imposed by the Bank of Canada and individual lenders. The implications to Canadian debt levels and the housing market are factors advisors should consider when offering holistic advice to clients.

More details about the rates used to calculate mortgage qualification are outlined in our previous coverage here.

The implementation of this stress test seems to be working. According to Statistics Canada, home buyers are borrowing less. For the first quarter of 2018, consumer lending totalled $22.2 Billion, a decline from the $25.4 Billion cited for the last quarter of 2017. Even more notable is the fact that Canada’s debt-to-income ratio decreased from 169.7 to 168 percent during the same time period.

Debt-to-income ratio is a criterion used by many lenders to determine borrowing eligibility. However, it’s also part of a sound financial strategy for Canadians who tend to try and live above their means. Once this percentage rises too high, individuals may struggle to meet their financial obligations and effectively pay down their debt.

Advisors can step up by learning how to help Canadians manage their debt. Knowledge Bureau’s Debt and Cash Flow Management certificate course helps professionals in financial services gain the skills needed to proactively help their clients plan for and manage their financial health by reporting on improvements in debt and savings over time. The focus is on a healthy balance sheet and responsible use of debt in building family wealth. Offering debt management services is a great way to build trust, and help clients find solutions to stubborn and difficult problems.

This is even more important as these new lending requirements have also helped to stabilize the hot housing market. Since real estate makes a major contribution as a wealth builder, and the primary residence is the biggest asset most Canadians own, this has benefits to a Real Wealth Management strategy. Understanding the implications of these current trends, and how they should be integrated into  holistic advice for clients, is key to the multi-faceted approach that is being demanded of today’s advisors.

Additional educational resources:

Brush up on your debt management, or real estate investment knowledge to help your clients navigate these issues in a changing world. Take the Debt and Cash Flow Management, and Tax Strategies for Investors certificate courses. Both contribute credits towards a Master Financial Advisor – Retirement Services Specialist designation.

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