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mortgage stress test

Minimum Qualifying Rate for Both Mortgage Stress Tests Left at 5.25%

As part of its annual review of the stress test for uninsured mortgages, the Office of the Superintendent of Financial Institutions today confirmed the minimum qualifying rate will remain at 5.25%.

That means borrowers making a down payment of 20% or more will need to prove they can afford payments based on their contract rate plus 2% or 5.25%, whichever is higher. Currently, about 90% of mortgage borrowers are being qualified at the 5.25% minimum qualifying rate (MQR) rate as opposed to their contract rate plus 2%, OSFI said.

The Department of Finance followed suit by leaving the MQR unchanged for insured mortgages, or those putting down less than 20%.

“Maintaining the current minimum qualifying rate will ensure prudent underwriting standards for insured mortgages,” read a joint statement from the Deputy Prime Minister and the Minister of Finance. “We will continue to monitor the housing market and review the minimum qualifying rate in order to adjust it as warranted.

OSFI said it made its decision based on the current environment of increased household indebtedness and low interest rates, adding it is essential that lenders continue to test borrowers to ensure they can afford their mortgages “during more adverse conditions.”

“Sound mortgage underwriting is critical for maintaining the stability of the financial system,” Peter Routledge, Superintendent of OSFI, said in a statement. “This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”

On a media conference call following the announcement, Assistant Superintendent Ben Gully said OSFI considers a range of factors when assessing the MQR, including interest rate sensitivity, changes in borrowers’ income, changes in house prices or imbalances and lenders’ funding costs.

He added that the supply and demand imbalance in the housing market is a “long-term prudential risk.”

“A sustained, multi-year imbalance between housing demand and supply intensifies risk to Canada’s housing market and to Canada’s system of housing finance. The imbalance tends to drive price increases to ever-higher levels relative to income. This, in turn, induces more Canadians to resort to more leverage when buying  a home.”

OSFI reviews the MQR each December and said it will make further adjustments “if conditions warrant.”

“We will continue to monitor housing markets across Canada and apply our supervisory focus to both changes in the market and lenders’ practices,” Gully said.

Stress Test Tightened in 2021

OSFI introduced its stricter stress-test for uninsured mortgages in June, which was promptly adopted by the Department of Finance for insured mortgages. The MQR for the stress test was previously 4.79%, nearly 50 basis points lower.

The change was estimated to have reduced purchasing power for new buyers by between 4% and 5%.

Economists from National Bank had estimated that under the new qualifying rate, the maximum amount that could be borrowed would decrease by 4.5%, or from $442,000 to $422,000 for a median-income household, they wrote.

OSFI Sees “Modest” Risk in Housing Credit

Asked why OSFI didn’t raise the floor rate today, Gully said mortgage credit risk has risen “only modestly.”

“While housing-related vulnerabilities remain elevated, residential mortgage credit risk has risen only modestly,” he said. “Our view is other measures taken by OSFI and other federal financial sector agencies have contributed to a margin of safety in the market.”

His comment echoed remarks from OSFI head Peter Routledge last month. Since then, house prices in Canada have continued to rise, reaching a record high $720,850 in November, according to the Canadian Real Estate Association. That’s up over 19% compared to a year ago.

“Despite this exuberance and rising mortgage credit levels, Canadians are dedicating less income to debt service payments such as mortgage payments, automobile loans and credit card payments,” Routledge said at the time.

Overall, residential mortgage credit growth is rising at a pace of about 10% annually, he added.

Gully was asked if anticipated interest rate hikes in 2022 from the Bank of Canada played any role in OSFI’s decision to leave the MQR unchanged, but he pointed to the dynamic structure of the stress test that already accounts for interest rate fluctuations.

The mortgage stress test is “designed to reflect a range of different mortgage interest rates,” he noted. “There’s an acknowledgement that rates can change over time and that’s why we’ve built a mechanism that preserves a margin of safety for borrowers to account for a range of outcomes,” with Bank of Canada interest rate increases being one of them, he added.

(Story updated)