Regulator holds firm on stress test
Banking watchdog defends tighter mortgage rules
TORONTO — Canada’s financial regulator hit back at criticisms of its stress test for uninsured mortgages, which has made it harder for borrowers to qualify and weighed on national home sales, but said it is open to changes when warranted.
Although interest rates have gone up over the past year since it introduced the tighter mortgage underwriting regulations — which require a borrower to prove they can keep up with their payments if interest rates rise — a “margin of safety” is still “prudent”, said Carolyn Rogers, the number two at the Office of the Superintendent of Financial Institutions on Tuesday.
Interest rates remain historically low while personal debt levels remain high, and borrowers face other risks to their ability to pay their mortgage such as changes to their income or other expenses, said the assistant superintendent of regulation.
“Should that margin of safety be monitored, and should it be changed and adjusted if conditions in the environment change? Of course it should. OSFI monitors the environment on a continual basis,” Rogers said to the Economic Club of Canada in Toronto.
OSFI on Jan. 1, 2018 introduced tighter mortgage underwriting guidelines, the most significant of which was a stress test for homebuyers with a more than 20 per cent down payment.
These borrowers must prove that they can service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. The policy reduces the maximum amount buyers will be able to borrow to buy a home.
National home sales fell by 2.5 per cent in December from the previous month to cap off the weakest annual sales since 2012.
Rogers in her lunchtime speech addressed a raft of criticism of OSFI’s stress test, including concerns about “unintended consequences” such as first-time home buyers being locked out or having to defer their purchases.
“The escalating cost of home ownership in Canada, and its knock-on effects to the economy and to our society, is a problem... But the answer to that problem, cannot be more debt,” she said.
The assistant superintendent also responded to criticisms that the stress test for federally regulated lenders has reduced competition, as borrowers can avoid it if they renew their mortgage with their existing bank. Canada’s largest banks have said they have seen an uptick in mortgage renewal rates in recent quarters.
OSFI has put in place a tracking system to monitor and guard against the risk of reduced competition, Rogers said.
As well, worries that the stress test has led to borrowers who no longer qualify to turn to unregulated lenders is a “legitimate concern,” Rogers said.
Mortgage brokers and the real estate industry are in a good position to help manage this risk, she added.
“If you see risks, if you think these options are putting your purchaser or borrower in a vulnerable position, you should steer them away. It’s the right thing to do.”