Essential that lenders test borrowers to ensure mortgages can be repaid in tougher times, says watchdog
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With household debt continuing to rise, Canada’s top banking regulator is leaving a stress test in place for uninsured mortgages.
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To qualify for a home loan, buyers will have to demonstrate their ability to pay the greater of 5.25 per cent interest, or their mortgage contract rate plus two per cent.
“In an environment characterized by increased household indebtedness and low interest rates, it is essential that lenders test their borrowers to ensure that mortgages can continue to be paid during more adverse conditions,” the Office of the Superintendent of Financial Institutions said following its annual December review.
OSFI noted that mortgages are one of the largest exposures banks carry on their balance sheets, so it is crucial that they ensure borrowers can continue to repay their mortgage loans when interest rates are rising.
“Sound mortgage underwriting is critical for maintaining the stability of the financial system,” said Peter Routledge, superintendent of OSFI. “This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”
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He said OSFI, which works with the department of finance when setting the minimum qualifying rate for uninsured mortgages, will continue to monitor the appropriateness of that rate throughout the year and make adjustments if conditions warrant.
Uninsured mortgages are residential mortgages where buyers make a down payment of 20 per cent or more.
OSFI introduced the minimum qualifying rate, or stress test, in 2017, after finding examples of “relaxed” mortgage underwriting at some lenders. It came into effect in January 2018.
Economists at CIBC Capital Markets expect a surge in home prices to continue as Canadians try to get ahead of an interest rate hike.
The Bank of Canada signalled in October that the overnight rate, which sits at 0.25 per cent, could start rising in the “middle quarters” of 2022.
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