Whatever happened to Ottawa’s planned tweak to the mortgage stress test?
The pandemic postponed Ottawa’s planned tweak to the hotly debated mortgage stress test, and now officials appear in no hurry to revisit the policy even as the crisis recedes.
In February, following months of pressure from the real-estate industry, the Department of Finance and the federal banking regulator announced they would rejig the “floor” of stress tests that borrowers must pass to qualify for insured and uninsured home loans.
Then came COVID-19, and a sweeping government rescue that included regulatory relief for lenders. As part of the response, the change to the stress test, which was planned for April, was suspended indefinitely.
Last month, the Office of the Superintendent of Financial Institutions announced it would “gradually restart” policy work in the fall, but made no mention of resuming consultations on the change to its stress test for uninsured mortgages, a key component of the regulator’s B-20 guideline.
OSFI has instead said it will relaunch its policy work by publishing a paper on the risk posed to federally regulated financial institutions by technology, such as when it comes to cyber security and artificial intelligence.
“Currently the housing market in Canada continues to evolve given the unprecedented conditions brought on by the COVID-19 pandemic,” an OSFI spokesperson said in an e-mail. “OSFI needs to be sure that consultations on the new proposed B-20 benchmark rate for uninsured mortgages reflects Canada’s new context.”
Meanwhile, the stress test, which emerged as an unlikely election issue in the 2019 campaign, remains unchanged, both for insured and uninsured home loans. That means the rate at which borrowers are tested could be lower because the Bank of Canada has slashed interest rates, but maybe not as low as if the pre-pandemic tweak had happened.
“The proposed new benchmark rate for the minimum qualifying rate for insured mortgages remains suspended until further notice,” the Department of Finance told the Post. “The government continues to monitor the evolving economic conditions, and is ready to act as appropriate to support a stable housing market and the overall economic recovery while safeguarding financial stability.”
Before the pandemic, adjusting the mortgage stress tests was an issue on the radars of bankers, realtors, regulators and federal politicians. Borrowers had packed on a lot of debt and the Canadian housing market was being watched closely for any signs of a wobble.
In December, Prime Minister Justin Trudeau tasked Finance Minister Bill Morneau with reviewing and considering recommendations from financial agencies about making the stress test “more dynamic.” By February, Morneau and OSFI announced that a new “floor” for the minimum qualifying rates for mortgages that are both insured and uninsured against a borrower defaulting would be installed April 6.
Borrowers seeking mortgages must show they can keep making their payments if conditions change, such as if interest rates shoot up or they lose part of their income. Regulators said stress-testing has helped tighten up mortgage underwriting and bolster the financial system, but some in the housing sector saw it as an obstacle that could stand in the way of would-be homeowners.
Still, OSFI had noted a growing difference between actual and advertised mortgage rates, and Finance had said the change to the test’s floor would make it “more representative of the mortgage rates offered by lenders and more responsive to market conditions.”
Rather than using a fiveyear benchmark published by the Bank of Canada – which is based on rates “posted” by the country’s six largest banks – the new floor was to be set using mortgage-insurance applications, plus an additional 200 basis-point buffer. Borrowers would then be tested with the new benchmark or their contract rate, whichever is higher. For uninsured mortgages, it would be the contract rate plus two percentage points.
While that change may be in limbo, the Canadian housing market is picking up steam after a slow period during the earlier days of the pandemic.
Five of Canada’s Big Six banks have also lowered their “posted” five-year fixed mortgage rates to 4.79 per cent as of Tuesday afternoon, according to RateSpy.com. Given the Bank of Canada’s benchmark is the mode – or most frequently used – of those six rates, the floor is likely to fall to 4.79 per cent from 4.94 per cent on Wednesday, when the central bank is due to update the figure.
If the stress test’s floor was set the way the government had proposed, as of Monday it would be around 4.09 per cent, according to Dan Eisner, CEO of Calgary-headquartered brokerage True North Mortgage Inc.
“It was initially thought using bank posted rates would be a close approximation of market rates in general,” Eisner wrote in an email. “However, this has proven not to be the case.”
But for now, with people and businesses still recovering from the pandemic’s effects, and with hundreds of thousands of borrowers having deferred mortgage payments because of COVID-19, Ottawa has decided against adding fuel to the housing market.
“If they did . . . go ahead with that change today, it would be a pretty big adjustment,” said James Laird, cofounder of Ratehub.ca and president of CanWise Financial mortgage brokerage. “And that might be why they’re hesitating, to be honest with you. They might not like the magnitude of the drop in the stress test because of the historically low rates.”