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The top banking regulator is moving forward with revising key mortgage stress testing guidelines following feedback from lenders
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Published on October 16, 2023 • 2 minutes reading time
A “For Sale” sign is posted outside a home in Toronto’s Riverdale neighborhood. Photo by Evan Buhler/The Canadian Press Files
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Canada’s top banking regulator is shelving some key proposals aimed at discouraging homebuyers from taking on too much debt and protecting banks’ bottom lines.
Based on feedback from lenders since January, the Office of the Superintendent of Financial Institutions said Oct. 16 that it would not impose stricter regulatory limits on debt service coverage, part of a proposal to limit loans from lenders with high debt service ratios. Most of January’s proposals concerned uninsured mortgages.
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“After carefully considering stakeholder feedback, we agree that regulatory limits on debt service coverage should not be sought,” OSFI said. “While such restrictions could provide greater consistency, they would remove too much risk-based decision making and risk responsibility from lenders.”
The regulator explained that certain limits apply to insured mortgages by law, but noted that these generally serve public policy objectives that go beyond the scope of OSFI’s mandate of regulatory soundness and financial stability.
“A stronger principles-based expectation may therefore be more appropriate” than the originally proposed regulatory limits, OSFI said.
The regulator is revising its B-20 policy, which includes the mortgage stress test first introduced in 2012 and adds additional thresholds in 2018.
OSFI proposed a number of possible changes in January 2023, including: new “affordability” stress tests to adapt to the increased payment and renewal risks of higher interest rates, while making it easier to qualify for longer fixed terms with lower risks.
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“Depending on what OSFI ultimately orders, the impact could be significant for home prices, lender lending volumes and the options available to individual borrowers,” said Rob McLister, veteran mortgage analyst and advisor on his blog MortgageLogic.news.
McLister said OSFI appears to have abandoned a plan it proposed to use debt-to-income measures to limit mortgage debt and total debt as a percentage of borrower income, which the regulator said was “too complex to implement at this time.”
This was the industry’s biggest concern among all OSFI proposals
Rob McLister
However, he pointed out that while lenders have also sought to eliminate loan-to-income ratio metrics – arguing that they ignore a borrower’s assets, hurt smaller lenders and are unnecessary because higher interest rates already drive those metrics push down high levels – OSFI seems to be sticking around.
“This was the industry’s biggest concern of all the OSFI proposals,” McLister said.
Meanwhile, the regulator rejected industry proposals to regulate housing differently in urban markets such as Vancouver and Toronto. However, OSFI appears to agree with lenders’ proposals to task the Canada Revenue Agency with verifying homebuyers’ income.
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Overall, McLister said the “bright spot” for the real estate industry is that many changes proposed nine months ago appear not to be implemented after all.
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“Our regulator threw out a lot of proposals last January. It now appears that few of them will remain,” he wrote.
“Furthermore, OSFI does not want to fall too quickly into a possible recession and cautions that ‘the cumulative impact of multiple actions could have unintended, negative consequences’.”
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