Mortgage stress test an imperfect regulatory measure, says OSFI head

Mechanism an 'incomplete' means of safeguarding financial system stability, according to Routledge

Mortgage stress test an imperfect regulatory measure, says OSFI head

The current mortgage stress test in Canada is an “incomplete” and “imperfect” mechanism, the head of the national banking regulator has said, as Canadians continue to grapple with the impact of higher borrowing costs thanks to interest rate hikes.

Peter Routledge, superintendent at the Office of the Superintendent of Financial Institutions (OSFI), told an audience at the Scotiabank Financials Summit last week that the mortgage qualifying rate, which requires borrowers to prove they can absorb the impact of payments above their contract rate, had proven a useful but flawed measure in the turbulent environment of recent years.

“As effective as that stress test was, it was not perfect,” Routledge said. “Perhaps it is better to call it incomplete.” He noted that OSFI sought “an integrated set of common-sense protections that work effectively both when interest rates are higher than normal, like today, and when interest rates are lower than normal, like during the COVID years.”

Many borrowers who opted for variable-rate mortgages during the pandemic have seen their contract rate skyrocket in recent times amid a series of aggressive interest rate hikes by the Bank of Canada, with consumers also required to qualify at a higher rate if they switch to another lender.

Routledge said OSFI estimates variable-rate, fixed-payment mortgages total around $369 billion outstanding in a mortgage market of $2.1 trillion, with banks offering those types of product reporting around $260 billion of the total with transient amortization levels of more than 35 years.

OSFI is currently working on a new supervisory framework, Routledge highlighted, marking the first substantive revision to come into effect during the last 25 years. That update is set to arrive in 2024.

The regulator is also reviewing lenders’ mortgage guidelines, with an update expected to be released in October. Routledge emphasized that while Canada’s current risk environment is “growing more complex,” it represented a “new normal” for the financial system.