Feds, banking regulator plan changes to mortgage tests

Benchmark rate to be replaced as nation sees greater activity in housing markets

The federal government and the federal banking regulator are planning to tweak mortgage stress tests in time for the busy spring home-buying season, a move that could make it easier for would-be owners to get a loan and add fuel to Canada’s housing market.

Finance Minister Bill Morneau and the Office of the Superintendent of Financial Institutions announced Tuesday that they aim to replace the current benchmark rate — or “floor” — that is used in stress tests for mortgages both insured and uninsured against borrower default.

Currently, the benchmark for those minimum qualifying rates is published by the Bank of Canada and based off the posted five-year conventional mortgage rates offered by the country’s six largest lenders. Following a review, both the federal government and OSFI said the floor had fallen out of step with actual housing market conditions, and that it is now slated to be replaced with a new benchmark as of April 6.

“The government will continue to monitor the housing market and make changes as appropriate,” Morneau said in a press release. “Reviewing the stress test ensures it is responsive to market conditions.”

Morneau sets the insured stress test and OSFI sets the uninsured one, with the latest versions put in place in 2016 and 2018, respectively. The new benchmark for the tests will be a weekly, five-year rate calculated by the Bank of Canada and based on mortgage insurance applications, plus a “buffer” of two percentage points.

However, Morneau and OSFI are adjusting their respective mortgage stress tests as Canada’s housing markets have been seeing increased activity, with more and more buyers competing for a finite supply of real estate. Moreover, the stress tests were put in place to ensure borrowers could meet their obligations to federally regulated financial institutions if there was a change in circumstances, such as a hike to interest rates.

One effect of a new floor for the stress tests could be that it makes the historically busy spring season for the housing markets even busier. While bank CEOS have cautioned the federal government against too much stress-test tinkering, the real-estate industry had been particularly vexed over the test for uninsured loans, arguing possible homebuyers were being pushed out of the market.

OSFI said its new benchmark would be roughly 4.89 per cent as of Tuesday, or about 30 basis points below the current floor, noted Robert Mclister, the founder of mortgage-rate comparison website Ratespy.com. This could come in addition to a “psychological

impact” on buyers who were already worrying about missing their chance to own a home.

“So that’s going to heat up a spring market that was already shaping up to be pretty hot,” Mclister said.

But both the federal government and OSFI had also been sending signals that an adjustment was coming — Morneau was ordered to consider such a change in a mandate letter from Prime Minister Justin Trudeau.

According to the government, the review of the stress test for insured

Reviewing the stress test ensures it is responsive to market conditions.

mortgages found standards continued to ensure borrowers were able to afford their homes even if circumstances did change. The finance minister will be allowed to adjust the new two-percent buffer as well.

OSFI is inviting input on switching to the new benchmark, but is proposing it be effective April 6 in order to co-ordinate with the insured-mortgage measure.

“The spread between actual contract rates and the current benchmark rate has widened recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed,” OSFI said in an industry notice on Tuesday. “The new benchmark rate would replace the five-year conventional rate, and would be more representative of the broader market and responsive to fluctuations in actual contract rates.”

Mortgage-default insurance is required when borrowers make a down payment of 20 per cent or less of a home’s purchase price. With the changes in place, the minimum qualifying rate for an insured mortgage will now be either the new benchmark rate or the rate on a borrower’s contract, whichever is higher. For uninsured loans, it would be the greater of the benchmark or the contract rate plus two percentage points.

The Canadian Real Estate Association praised the changes in a statement Tuesday, saying it would better reflect what’s happening in the market.

“Realtors have advocated for changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to less-regulated options, and real estate markets across the country in need of relief,” said Jason Stephen, president of the CREA, in the statement.

Mclister predicted the adjustments could prompt some pushback given the timing of the move, but argued “decoupling” the stress-test rate from the rates published by the Big Six needed to happen.

“If you think the government can time housing effectively, then obviously you haven’t seen its GDP estimates and budgetary estimates,” he said. “The bigger story is that this is a long-term win for consumers in the housing market.”