Regulator says mortgage stress testing rules may change as interest rates rise and housing market declines

Regulator says mortgage stress testing rules may change as interest rates rise and housing market declines

Fixed mortgage rates are rising rapidly as the Bank of Canada embarks on an aggressive round of rate hikes, and could soon pass the OSFI minimum eligible interest rate of 5.25 percent.Jonathan Hayward/The Canadian Press

The Canadian banking regulator is leaving the door open to adjusting the mortgage stress test before the end of this year, as the cost of borrowing rises and the housing market begins to cool across the country.

Although the Office of the Superintendent of Financial Institutions has expressed satisfaction with the current rules, the regulator said it may reconsider them again before announcing the annual stress test scheduled for mid-December.

“If circumstances change, we reserve the option to return more than once a year and that is a very big part of our approach and that really applies to any part of the guidance we have at OSFI,” Ben Jolly, deputy supervisor of oversight at the regulator, said on a call with reporters to discuss the changes. organizational.

Did OSFI Make the Right Call on the Mortgage Stress Test?

“We are constantly reviewing it, its applicability, and if the circumstances call for it, we will obviously be out of the cycle to address it,” he said.

Since OSFI tightened its mortgage stress test last June, the housing market and borrowing conditions in the country have changed dramatically. The regulator has to contend with whether its rules are still effective in the present environment.

OSFI rules apply to borrowers who do not need mortgage insurance, which occurs when borrowers make a down payment of at least 20 percent of the property’s purchase price. The regulator requires borrowers to demonstrate their ability to make mortgage payments at an interest rate of 5.25 percent, or 200 basis points above the mortgage contract, whichever is higher.

But now, fixed-mortgage rates are rising rapidly as the Bank of Canada embarks on an aggressive round of rate increases, and could soon pass the OSFI minimum qualifying interest rate of 5.25 percent.

Today, the average five-year fixed rate mortgage has an interest rate of 4.19 percent, according to mortgage brokers. This is up from the January average of about 2.69 percent. This means that the borrower must now demonstrate their ability to make their mortgage payments at an interest rate of 6.19 percent if they want a fixed rate mortgage, which is already above the stress test limit of 5.25 percent. And stress testing will become more and more difficult as mortgage rates continue to rise.

This will push more borrowers into variable mortgage rates, as well as into non-bank mortgages – which usually have higher interest rates than approved banks.

Already, borrowers are seeking variable rate mortgages, which are about 2.4 percent today, according to mortgage brokers. Ilan Weintraub, co-founder of Mortgage Outlet Inc.

Borrowers are also turning to alternative lenders, such as trusts and private mortgage investment firms, which do not have to comply with federal banking rules.

Samantha Brooks, CEO of Mortgages of Canada, said her clients are now flocking to alternative lenders. Today, the vast majority of its clients are borrowing from an alternative lender compared to about half of its client base at the beginning of this year. “We’ve seen a massive increase over the past two weeks,” she said.

Mortgage stress testing was first introduced during the 2016-2017 housing boom to ensure homebuyers could withstand mortgage payments if interest rates rose, as well as to slow overheated markets in Toronto and Vancouver. It falls under OSFI’s set of residential lending rules, also known as the B-20.

Asked if OSFI was comfortable with stress testing in the current high rate environment, Mr Jolly said: “We are comfortable that the expectations contained in the B-20, the work we do in oversight and actions taken by the institutions we oversee put us on a path to sustain on flexibility in the financial system.

The stress test also applies to borrowers who need insurance or when the borrower makes a down payment of less than 20 percent, although this is specifically supervised by the Department of Finance. Usually, OSFI and Finance Department work in tandem on stress testing.

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2022-05-12 09:00:00

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