As central banks raise interest rates in their fight against inflation, one group finding itself as ‘collateral’ damage in this battle is prospective home owners and those in the housing supply chain – everyone from construction companies and workers to building suppliers and lenders.
They have been caught in what was described as the mortgage stress test and at least one bank is saying it is time to rethink that strategy.
RBC Royal Bank has issued a think piece suggesting the stress test did its job. Back when interest rates were much lower, buyers were forced through an exercise to see if their mortgage application would still fly if rates were two points higher. The idea was to prevent massive default waves in the event of rates shooting up quickly.
That’s the point, says the bank. Rates have shot up and the stress test did its job. We are not seeing a tidal wave of defaults. But the chances of a further two point hike are unlikely so maybe the benchmark should be pared back a bit…perhaps to a one percent premium.
