Canada’s top banking watchdog is taking another shot at overhauling its stress test on residential mortgages in a move that would make it harder for some borrowers to qualify.
The Office of the Superintendent of Financial Institutions (OSFI) launched a new consultation on its B-20 stress test Thursday. Under the proposal tabled, the minimum qualifying rate for uninsured mortgages would be the contract rate plus two percentage points or 5.25 per cent, whichever is higher. OSFI also said it’s proposing to revisit the qualifying rate annually.
OSFI Superintendent Jeremy Rudin said the changes are aimed at safeguarding lenders and borrowers.
“The overarching concern that we have is to make sure that the financial system is ready in case we have a return to pre-pandemic financial conditions,” said Rudin in an interview Thursday.
“We want to make sure that lenders will have borrowers who are able to continue to service those mortgages if we have a return to interest-rate and financial conditions that are more representative of the pre-pandemic era.”
Currently, the stress test requires borrowers who put down at least 20 per cent to prove they could meet their mortgage obligations at the higher of their contract rate plus 200 basis points, or the Bank of Canada’s five-year rate, which stands at 4.79 per cent.
The new wave of consultations will be open for comment until May 7. OSFI said Thursday it will unveil final amendments to its proposal by May 24, with the revised regulations coming into force on June 1.
OSFI first implemented a version of the stress test in 2016 amid concerns borrowers could be getting in over their heads with large mortgages due to a run-up in home prices.
The fresh round of consultations comes more than a year after OSFI abandoned its review of the measures. The watchdog dropped its consultations in mid-March of 2020 due to COVID-19 uncertainty, amid policymaker fears that the pandemic would send home prices spiraling.
Those concerns about a sharp drop in home prices failed to materialize, as a combination of rock-bottom interest rates and the shift to a work-from-home routine sent prices skyrocketing. Average home prices in Toronto and Vancouver have eclipsed $1 million during the pandemic, and the rise has bled into outlying areas, sending prices in some suburbs more than 30 per cent higher.
Rudin said that these measures aren’t meant to affect house prices, but are aimed at ensuring stability for lenders.
“I think that housing prices in Canada are really in the grip of some very strong forces,” he said. “There’s extremely low interest rates that we have, there’s the fact that many more people want to upsize their accommodation than want to downsize, and there’s also the K-shaped recovery.”
“What we’re doing today is about reinforcing the stability of the financial system. I wouldn’t expect it to have a significant or lasting effect on house prices in and of itself.”