A Toronto home for sale is seen in this 2019 file photo.Tijana Martin/The Globe and Mail
Canada’s banking regulator says it is not changing the mortgage stress test, ignoring calls to relax the rules and offer relief to borrowers after this year’s spike in interest rates.
The Office of the Superintendent of Financial Institutions (OSFI) said Thursday that the stress test for uninsured mortgages would continue to require borrowers to qualify at a rate of 5.25 per cent or two percentage points above their actual contract, whichever is higher.
“It is prudent that lenders continue to test borrowers for adverse conditions,” OSFI said in a scheduled announcement.
With mortgage rates hovering around 5 per cent, borrowers must show they can make their loan payments at an interest rate of 7 per cent. That means current rates have rendered OSFI’s 5.25-per cent-threshold, or minimum qualifying rate, meaningless.
Higher borrowing costs combined with the mortgage stress test have priced many first-time homebuyers out of the market. They have also made it harder for borrowers to renew their mortgages, because they are required to be stress tested if they switch banks or change the terms of their mortgages, including the amortization period.
Mortgage brokers said Thursday’s announcement means many borrowers will have little choice but to stay with their current lenders.
“The stress test today will limit many Canadians coming to term to shop for their next best mortgage solution,” said Frances Hinojosa, a broker and co-founder and CEO of Tribe Financial Group. “The only conditions where a client does not have to retest is if they stay with the current lender and the mortgage amount and amortization stay the same.”
The country’s housing market has slowed significantly since the Bank of Canada started its rate hiking cycle to slow inflation. The latest statistics showed another monthly drop in resales and home prices.
Sales were down 3.3 per cent in November and 39 per cent year-over-year, according to Canadian Real Estate Association data released Thursday.
Meanwhile, the typical home price across the country hit $744,000 last month. That was down 1.4 per cent from October and 11.5-per-cent lower than the peak price of $840,600 in February, according to CREA data. The regions that experienced the greatest price increases when interest rates were near zero have continued to lose the most value. That includes Toronto suburbs such as Oakville, as well as medium-sized Ontario cities such as Barrie, Guelph, Cambridge, London and Kitchener-Waterloo.
However, the number of listings was down month-to-month, suggesting that homeowners – particularly those with variable-rate mortgages – have been able to manage higher mortgage costs and are not rushing to put their properties on the market.
On Thursday, OSFI said it will launch a review of its B-20 residential mortgage underwriting guidelines. It expects to leave the stress test at its current rate during the review, though the “economic environment could result in a more immediate change.”
OSFI did not provide a specific timeline for the review but said it would take months, not weeks. Asked Thursday whether it would consider relaxing rules around creditworthiness and mortgage portability, the regulator said it did not want to signal what would be taken into consideration. Tolga Yalkin, OSFI’s assistant superintendent of policy, innovation and stakeholder affairs, said the regulator would look at a wide range of debt serviceability measures.
Mortgage rates have more than doubled over the past year, forcing many borrowers to consider stretching out their amortization period in order to make their monthly payments. The stress test has also pushed some borrowers to subprime lenders such as mortgage investment corporations, which have more expensive loans.
While the announcement means little will change among banks in the short term, Canada’s largest lenders are already feeling the tightness of the housing market. Mortgage loan growth, which helped bolster balance sheets during the pandemic, slowed in fourth-quarter earnings results in late November. Attracting new customers with mortgages has created “more pressure than we’ve ever seen before,” said Laura Dottori-Attanasio, CIBC’s head of personal and small business banking, on a quarterly conference call.
Many bank analysts expect mortgage growth to taper next year as central banks continue their campaign against inflation. Since OSFI’s barriers mean banks are unable to seek out less creditworthy customers or those who otherwise would have qualified before the stress test, residential lending divisions could be squeezed.
“We don’t think that this changes the outlook of the strategy of the banks at all,” Barclays analyst John Aiken said in an interview. If OSFI were to ease stress-test requirements, it could “potentially lead to the behaviour that those chasing market share may actually go down the credit curve or offer to less creditworthy candidates.”
In setting the mortgage stress test, OSFI said it consulted the Bank of Canada as well as the federal Finance Department.
OSFI’s stress test covers uninsured mortgages, which are available when homebuyers make a down payment of 20 per cent or more of the property’s purchase price. Insured mortgages, in which the down payment is less than 20 per cent, are also subject to a stress test, administered by the Department of Finance, which is expected to follow OSFI’s lead.