changes to stress test qualifying rate

OSFI Hints at Changes to the Mortgage Stress Test Qualifying Rate

The use of Canada’s benchmark rate in administering the mortgage stress test is currently under review, according to an official with the Office of the Superintendent of Financial Institutions (OSFI).

In a speech to the C.D. Howe Institute, Ben Gully Assistant Superintendent, Regulation Sector, said the use of the benchmark qualifying rate as the floor of Guideline B-20 stress testing for uninsured mortgages is “not playing the role that we intended.”

Uninsured mortgages (those with more than 20% down payment) are currently stress-tested on the higher of the borrower’s contract rate plus 200 bps, or the benchmark rate, which is currently 5.19%.

“For many years, our data showed the difference between the benchmark rate and the average contract rate was about 2%. This provided a healthy buffer,” Gully said. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

Indeed, fixed mortgage rates have been on a downward trajectory since the beginning of 2019.

mortgage stress testWhat likely won’t be changing is OSFI’s use of the contract rate plus 200 basis points for stress testing uninsured mortgages. “This helps borrowers and lenders manage a sudden change in circumstances such as an income loss, increased interest rates, and/or additional expenses,” Gully said. “This will therefore remain a key part of OSFI’s guideline B-20.”

Gully added that “while we are aware of contrary opinions, “institutions, markets and borrowers have all come to see the value of a qualifying rate even if there remains debate about the appropriate level of responsiveness.”

“It’s an interesting acknowledgement [by OSFI] that the BoC posted rate is now possibly too stringent a test given our market rates,” Paul Taylor, President and CEO of Mortgage Professionals Canada told CMT. “This is very encouraging for the marketplace and own lobby efforts.”

In his speech, Gully also provided OSFI’s take on other aspects of the mortgage industry.

On renewals…

For mortgage renewals, existing lenders don’t typically re-underwrite the loan if the borrower is current with their payments. “OSFI sees this as a reasonable practice…” Gully said. “However, we do expect lenders to update their risk analysis throughout the life of the loan.”

“We will continue to look at this issue closely through regular reporting on rates for new originations and renewals,” he added. “If we see outliers, then we will follow up directly with lenders to understand why this is happening and what they are doing about it.”

On HELOCs…

OSFI recognizes that combined loan products, such as HELOCs, “can make adding more risk easy for borrowers,” Gully said, adding that, “OSFI is concerned that some lenders may be taking on more risk than they bargained for with these open-ended commitments.”

The problem, he noted, is that loan products such as HELOCs can conceal increasing debt loads while payments remain the same.

“This can make assessing credit quality more difficult for lenders,” he said. “We are working with the Bank of Canada to collect data to assess the potential vulnerabilities of these products as well as the larger market and economic issues.”

  1. Rates are far too high.. ussery comes to mind… banks are robbing people blind …get rid of international banking cartel..

  2. I purchased a townhouse under construction and in 3 graduated steps put $60,000 down payment to developer. I was not concerned about project being finished, then wham, government brings in stress test. My bank whom my mortgage is through now tells me I no longer qualify. I had to take $30,000 more from savings or risk losing my down payment. Stress test is exactly that. I am stressed. Now there saying hmmm maybe not the right thing to do. Thanks

  3. It’s TRUE that most banks not all will reapply a stress test prior to qualifying for loan
    Recentlying in a new condo offer I found substantial difference in terms of honoring an initial stress test
    in calling each bank prior to offer make sure for new builds they guarantee the initial qualification will apply at closing imho
    only one bank indicated they would honor the initial stress test this may be tide to time to close

  4. It would help to know when the OSFI might be making a decision on whether to adjust (as in reduce) the stress test interest rate, especially for buyers with uninsured mortgages. With a large down payment, you have more equity in the house, so that should make the purchase less risky.
    Also, if you take a 5 year term, you will have paid down a fair bit of the mortgage when it comes up for renewal, so you should be assessed on your ability to pay the future (reduced) amount of the mortgage, rather than the current mortgage level.

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