Banking regulator defends stress test

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. This analysis has, and will continue to inform our guideline development process,” Rogers said to the Economic Club of Canada in Toronto.

The banking regulator also understands the need to “monitor the effects of the stress test under different interest rate changes,” she said after her speech.

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. An existing stress test already required those with insured mortgages to qualify at the Bank of Canada benchmark five-year mortgage rule.