Canada proposes tighter mortgage stress test as home prices surge

  4/8/2021 |   SHARE
Posted in Home Buyers by Stephen Gale | Back to Main Blog Page

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 Canada's financial regulator, which has been planning changes in its four-year-old mortgage stress test, on Thursday proposed making it tighter, following concerns that the initial measures could further stimulate the red-hot housing market.

The Office of the Superintendent of Financial Institutions (OSFI) is proposing that the new benchmark to determine the minimum qualifying rate for uninsured borrowers would be either the greater of a range of rates submitted by lenders plus 200 basis points or 5.25%, according to a letter to lenders.

It is broadly an increase from the initial plan announced in February 2020, which was shelved a month later as the coronavirus pandemic took front seat. That proposed the weekly median five-year fixed insured rate, calculated from mortgage insurance applications, as the benchmark, which stakeholders said would be "highly volatile."

The new measures are expected to come into force on June 1, with the fixed 5.25% rate replacing a benchmark made up of banks' advertised rates - currently 4.79% - which tend to be higher than actual market rates, to determine the minimum qualifying rate.

This will reduce purchasing power by about 5%, and raise the gross debt service ratio - the proportion of household income that covers housing costs - by about 1.6 percentage points, National Bank Financial analysts said in a note, adding they nevertheless do not expect a significant impact on lenders' underwriting decisions.

"The main reason we’re setting a 5.25% rate is because we feel a responsibility to make sure the financial system is ready in case we have to return to pre-pandemic conditions," Superintendent of Financial Institutions Jeremy Rudin told reporters. "We want to make sure that when the mortgages being taken today renew in three, four, five years, that lenders are protected."

The lower rates proposed earlier risked lighting a fire under housing markets, market watchers said.

The change to the 5.25% rate "means a higher benchmark rate than what would have occurred under the system already proposed," said Stephen Brown, senior Canada economist at Capital Economics.

"This will be particularly important in reducing the recent momentum in the prices for single-family homes" and instill confidence in the Bank of Canada that new loans can withstand higher interest rates, he added.

The benchmark would apply to borrowers with at least a 20% downpayment. OSFI will take feedback until May 7 and will reveal final changes by May 24, it said.

The Department of Finance, which makes rules affecting insured mortgages, those with less than 20% downpayment, said in a statement it will continue to monitor housing market conditions and "closely examine" the results of the consultation.

Source: Reuters



Bank of Canada Benchmark Rate, Home Buyers, OSFI, Stress Test



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