Reaction to the regulator's key move
The recent decision by Canada’s banking regulator to leave the mortgage stress test level unchanged was an unsurprising one, according to RBC’s assistant chief economist, with its cautious approach a reflection of the economic headwinds ahead.
Robert Hogue (pictured) told Canadian Mortgage Professional that while there may have been some space for the Office of the Superintendent of Financial Institutions (OSFI) to relax or adjust the qualifying rate, the impending economic downturn likely played a significant role in its choice to leave it untouched.
“We’re not surprised that they didn’t change it,” he said. “We thought there might be a little bit of a window to ease it a bit – but clearly, there’s still a lot of uncertainty out there and with Canada, in our view, entering a recession imminently, we’re not surprised to see regulators erring on the side of keeping things very cautious.”
In its yearly decision on the stress test, OSFI confirmed that it would be keeping the qualifying rate at the greater of 5.25% or two percentage points above the contract rate. Assistant superintendent – policy, innovation and stakeholder affairs Tolga Yalkin described the stress test as a “key tool supporting sound mortgage underwriting,” indicating its importance in helping borrowers absorb the shock of possible negative financial shocks.
OSFI is due to review its B-20 guidelines, which regulate residential mortgage underwriting, in January. That will include a further review of the qualifying rate – and while it indicated the stress test is likely to remain unchanged pending the outcome, the economic environment could see a more sudden change.
“They did indicate that they would review the B-20 guidelines and that there could be some changes,” Hogue said. “And we’ll see over the early part of 2023 what might be down the road.”
In a recent report. RBC said that the five-year fixed mortgage rate had only been above its current qualifying rate (just under 8%) just 16% of the time since 1991, when the Bank of Canada first introduced its policy targeting inflation.
What are the B-20 lending guidelines?
Introduced in 2012, OSFI’s B-20 guidelines laid out expectations for responsible residential mortgage underwriting, extending to any loan secured by a residential property as well as HELOCs (home equity lines of credit), home equity loans, and other related products.
It laid out five principles for prudent residential mortgage underwriting, including that federally regulated financial institutions have comprehensive underwriting policies and procedures, perform reasonable due diligence on borrower background, assess borrowers’ capacity to fulfil debt obligations, and have effective risk management practices in place.
Canada finance minister Freeland on OSFI decision to maintain mortgage stress test: “Ensuring the stability of Canada’s housing market is essential to protecting Canadians and to upholding Canada’s financial and economic resilience."— Paul Vieira (@paulvieira) December 15, 2022
In 2017, OSFI announced new changes to those guidelines, debuting the minimum qualifying rate and requiring borrowers to prove that they could afford payments equal to the Bank of Canada’s five-year benchmark rate or 2% above their mortgage rate, whichever was higher.
As Canada’s housing market surged amid a record-low-rate borrowing environment following the onset of the COVID-19 pandemic, the regulator announced in 2021 that the qualifying rate would be hiked to its current level (5.25% or the contract rate plus 2%).
Who decides the stress test level for insured mortgages?
The federal finance ministry, which regulates insured mortgages, usually follows OSFI’s decision on its own stress test.
Minister of finance Chrystia Freeland announced that the qualifying rate for insured mortgages would remain unchanged shortly after OSFI’s decision, describing it as an essential measure to ensure the stability of Canada’s housing market.
“Maintaining the minimum qualifying rate supports prudent underwriting standards for insured mortgages and builds in a buffer for home buyers in case of changing economic or personal circumstances,” Freeland said in a statement.
“Ensuring the stability of Canada’s housing market is essential to protecting Canadians and to upholding Canada’s financial and economic resilience.”
Freeland indicated that the government would continue to monitor the housing market and review the insured minimum qualifying rate where appropriate.
As part of a process announced by OSFI last year, the regulator reviews its qualifying at least once a year. Its two scheduled decisions to date (in 2021 and 2022) have fallen in December, in advance of a typically busy spring housing market.
What are your thoughts on whether it’s now time to revisit the mortgage qualifying rate in Canada? What advice are you providing to your clients on the issue? Let us know in the comments section below.