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Test Rate “has led to a more resilient residential mortgage finance system,” says Peter Routledge
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Published on December 12, 2023 • Last updated 14 hours ago • 3 minutes reading time
Homes in Langley, BC Photo by Darryl Dyck/The Canadian Press Files
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The Office of the Superintendent of Financial Institutions has stress tested uninsured mortgages at current levels.
Implementing the mortgage eligibility test at a higher interest rate of 5.25 percent or the contract mortgage rate plus two percent will help ensure lenders and borrowers “effectively manage the risks associated with residential mortgages,” said Peter Routledge, the superintendent from OSFI. said in a Dec. 12 statement.
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“The minimum interest rate for uninsured mortgages has resulted in a more resilient residential mortgage financing system, characterized by low default and delinquency rates.”
Critics have called on OSFI to relax the stress test because it was intended to ensure homeowners are prepared for the higher interest rates that are now occurring.
The stress test, officially called the floor rate, was introduced in 2018 when the Bank of Canada's daily interest rate, which banks use to set their mortgage rates, was historically low.
As interest rates rose sharply starting in March 2022, homebuyers were forced to qualify for ever higher mortgage rates. According to a report from rate comparison site Ratehub.ca, some were stress tested at 8.3 percent or even higher in August and September.
Phil Soper, CEO of Royal LePage, called for, among other things, a relaxation of the stress test.
“When launched in 2018, the regulator explained that this risk management tool was flexible and could be adjusted up or down to suit the needs of the economy,” he said on December 12, ahead of the OSFI announcement.
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“Now would be the time to lower this barrier to homeownership to allow more families to enter the market,” Soper said.
An uninsured mortgage typically involves a down payment of 20 percent or more. OSFI said it bases its stress test decisions on data from its ongoing monitoring of federally regulated financial institutions, as well as a range of “vulnerability indicators” that include the Canadian housing market and broader macroeconomic data.
“OSFI is confident that the MQR (minimum qualifying interest rate) as currently worded will result in lower residential mortgage delinquencies and default rates than would otherwise be the case if lenders did not use the MQR when originating homeowner mortgages,” the said Regulatory authority.
As interest rates rose from near zero to five percent, Canada's major banks worked with struggling homeowners to manage their payments by, among other things, extending amortization periods and negotiating lump sum payments. The federal government decided to codify these measures in the autumn economic statement in November. Among other things, it removed the need for some borrowers to re-qualify for the stress test when switching banks to renew their mortgages.
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Mortgages that combine fixed payments and variable interest rates are of particular concern to regulators because their structure means some borrowers cannot even cover the interest due in their monthly payments.
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Although there have been no widespread defaults or forced sales, many mortgages taken out when interest rates were at their lowest will come up for renewal in the next year or two, most likely at significantly higher interest rates.
The Canada Mortgage and Housing Corp. (CMHC) estimates that 2.2 million mortgages will need to be renewed in 2024 and 2025, representing 45 per cent of all outstanding mortgages in Canada – with these loans totaling $675 billion.
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