Canada resists call to ease mortgage stress test for uninsured home buyers
2022.12.15 16:15
© Reuters. FILE PHOTO: A realtor’s for sale sign stands outside a house that had been sold in Toronto, Ontario, Canada May 20, 2021. REUTERS/Chris Helgren
(Reuters) -Canada’s main banking regulator on Thursday said it would launch a review of its mortgage guidelines for uninsured borrowers in January but left a stress test unchanged, citing an uncertain economic environment.
Canadian mortgage rates have more than doubled from last year, sparking calls to drop the strict rules and offer relief to home buyers. But the Office of the Superintendent of Financial Institutions (OSFI) said the minimum qualifying rate (MQR) for uninsured mortgage borrowers would stay at 5.25%. This makes the benchmark either the rate the borrower pays plus 200 basis points or 5.25%, whichever is greater.
That means home buyers must show that they can service mortgages at 7% as mortgage rates stand around 5%. It also reduces the size of mortgage loan that a borrower can obtain.
“We expect to leave the MQR at its current rate pending the outcome of the review, although the economic environment could result in a more immediate change,” the regulator said.
OSFI introduced new rules in 2017, known as B-20, that tightened qualification for uninsured mortgages, in which borrowers are required to make at least a 20% down payment.
“Maintaining the minimum qualifying rate supports prudent underwriting standards for insured mortgages and builds in a buffer for home buyers in case of changing economic or personal circumstances,” said Finance Minister Chrystia Freeland.
Canada’s housing market has gone cold, with buyers sidelined by soaring borrowing costs and sellers holding off listing in hopes of a spring rally. Home prices fell for a ninth straight month in November, taking the decline from February’s peak to 11.5%, the Canadian Real Estate Association said on Thursday.
Reducing or eliminating the minimum qualifying rate requirement would increase risk in the financial system amid economic uncertainty, said Carl De Souza at DBRS Morningstar.
Canadian banks have increased their bad debt provisions as they brace for challenging economic times, their latest earnings showed.
“We view the announcement positively since the mortgage stress test has effectively added a margin of safety that improved borrowers’ ability to absorb interest rate increases,” De Souza said.
