New stress test for home buyers

TORONTO — Canada’s banking regulator said Tuesday it will go ahead with a new stress test for home buyers who don’t need mortgage insurance, who will soon have to prove they can make payments if interest rates rise.

The move is expected to reduce the maximum amount buyers will be able to borrow to buy a home, even if they have a down payment of 20 per cent or more as of Jan. 1.

The Office of the Superintendent of Financial Institutions set out final guidelines on the changes to its residential mortgage underwriting guidelines Tuesday, which are similar to what it had proposed in a draft consultation in July that was criticized for potentially increasing costs and limiting access to mortgages for buyers.

But the regulator did tweak the calculation of the qualifying rate for uninsured mortgages, to address concerns that using the contractual rate plus two per cent could lead borrowers to seek out shorter terms.

“We didn’t want to create an artificial incentive for borrowers to shorten terms because of the regulation,” superintendent Jeremy Rudin told reporters.

Would-be homebuyers will need to prove they can still service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points, or the fiveyear benchmark rate published by the Bank of Canada.

An existing stress test requires those with insured mortgages to qualify at the Bank of Canada’s benchmark five-year mortgage rate. Phil Soper, CEO of Royal LePage, said most first-time buyers are likely already subject to a stress test, but those eyeing a move to a larger home may be affected.