What effect is the mortgage stress test having on Canadian borrowers?

Qualifying rate remains at an elevated level

What effect is the mortgage stress test having on Canadian borrowers?

Despite some calls in the real estate sector for regulators to ease the mortgage stress test, there appears no imminent prospect of changes to the qualifying rate in the near future, according to a new analysis by real estate giant RE/MAX Canada.

The company noted that while opponents of the measure have said it increases affordability challenges for many Canadians, the Office of the Superintendent of Financial Institutions (OSFI) has given no indication that it’s ready to consider adjusting its rules.

“Now that the post-crisis real estate market is an environment where interest rates are at their highest levels since before the Global Financial Crisis, critics have wondered if the stress test is excessive, with some urging Ottawa to ease or suspend the measure,” RE/MAX said in a new report.

“For now, it appears that everything will remain the same, according to the country’s chief banking regulator.”

Notably, the mortgage stress test requires borrowers to prove that they will be able to afford higher payments should mortgage rates increase in the future, with the stress test usually adding 2% to the current mortgage rate.

The rule was meant to stop borrowers from taking on mortgages that were beyond their capacity to afford as well as prevent lenders from lending money to those who would have a hard time paying it back.

OSFI has indicated as recently as December that it is not considering changes to its much-discussed stress test.

“The minimum qualifying rate for uninsured mortgages has produced a more resilient residential mortgage financing system characterized by low default and delinquency rates,” said Peter Routledge, the OSFI chief.

Finance Minister Chrystia Freeland, meanwhile, said the government aimed to protect Canadians through making sure that they will be given ample support so that they will be able to afford their mortgages. She further said that the government will be monitoring the housing market so they could gauge if changes to the MQR were needed.

The move was supported by Fitch Ratings, a credit ratings agency.

“If reduced, it would lower the cost of mortgages and make housing more affordable, but would also increase credit risk, given current deteriorating economic conditions,” it said.

Canada Mortgage and Housing Corporation (CMHC) recently warned that about 2.2 million mortgages will be renewed in 2024 and 2025, totalling around $675 billion and representing around 45% of all outstanding mortgages.

CMHC further estimated that the higher mortgage rates will equate to $15 billion in additional payments for households each year as they renew their mortgages.

“This increase could represent an uptick of between 30% to 40% in their average monthly payment,” CMHC said, further warning of the possible consequences to the country’s economy as the funds will be reallocated from other sectors.