Canadian bank regulator hints it could change mortgage ‘stress test’ rules before year’s end

With the housing market softening, it’s time for Canada’s banking regulator to ease up on its mortgage qualifying rate or “stress test,” mortgage brokers argue.

In a statement this week, the Office of the Superintendent of Financial Institutions suggested it could make “adjustments” to its qualifying rate before the end of the year.

Each December, the regulatory reviews and conveys to the public the qualifying rate, ahead of the following year’s busy spring housing season.

But this week the office, an independent federal agency that supervises hundreds of financial institutions and over 1,000 pension plans in Canada, indicated an announcement could come before the end of this year.

“Throughout the rest of the year, OSFI continually monitors the Canadian housing market and mortgage practices, and may make adjustments at any point if necessary for the health of the Canadian lending industry,” the regulator said in a statement Thursday.

Some in the housing industry view this as a signal the office should and indeed will take steps given increasing interest rates this year and a resulting dip in house sales.

According to recent figures from the Toronto Regional Real Estate Board the region’s housing market saw a peak in February when houses and condos sold for an average $1.33 million.

But an interest rate hike in April, with more expected to soon from the Bank of Canada, and other factors saw average prices drop in the region to $1.25 million (though that’s still 15 per cent above the same time last year.)

“The market is softening, prices are coming down. They (OSFI) did the stress test to cool the market. They don’t need any cooling of the market anymore. It’s already there now,” said mortgage broker Kim Gibbons.

For home buyers with a minimum 20 per cent down payment (thus avoiding mortgage insurance), the rules require homebuyers to demonstrate they can shoulder mortgage payments at an interest rate of 5.25 per cent or their mortgage contract rate plus two per cent, whichever is higher . They were introduced in 2016-17 to cool the market and ensure purchasers weren’t overwhelmed by interest rate hikes

Brokers told the Star Thursday that average rates for five-year fixed term mortgages are between 4.19 and 4.25 per cent.

With the requirement of two per cent plus contract, a borrower would have to prove they could withstand an interest rate of up to 6.25 per cent, which Gibbons said is unfair and “makes no sense” under current conditions.

“As things stand now they have got to do something,” Gibbons added.

“Clients are going to alternative sources of lenders, credit unions where you don’t have to do two per cent above the contract rate to qualify. People can qualify with credit unions much easier,” she said.

“The stress test takes away about 20 per cent of your purchasing power. Not always, but that’s kind of the rule.”

Dan Eisner, CEO of Toronto broker True North Mortgage, also believes the Office of the Superintendent of Financial Institutions will step in before December.

“If the current housing market continues on a downward trend in home prices, that will give a lot of headroom to OSFI to reduce the stress test rate and requirements for the contract rate plus two per cent before the end of the year.”

”I wouldn’t be surprised if they just eliminate the contract rate plus two per cent portion of the stress test; it’s a bit too aggressive. It doesn’t make sense when the fixed rates are in the four per cent levels,” Eisner said.

“The stress test has pushed a lot of would-be homebuyers out of the market.”

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