Mortgage stress test still necessary, regulator says
Despite difficulties, more consumer debt is not the answer
With Canadians still racking up nearrecord levels of debt, the last thing they need is for banks to make it easier to borrow more by fiddling with the mortgage “stress test” introduced a year ago, says the country’s top banking regulator.
Under new rules passed at the beginning of 2018, Canadians looking for a new mortgage need to prove they could still afford it if rates rose by two percentage points. That stress test has prompted criticism it’s making it more difficult for Canadians — especially younger, first-time buyers — to buy a home. It has also increased the number of people borrowing from the unregulated private lending market.
“The escalating cost of home ownership in Canada, and its knock-on effects to the economy and to society, is a problem — and it’s a problem that is proving very challenging to address,” said Carolyn Rogers, assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), in a speech Tuesday.
“But the answer to this important problem cannot be more debt,” she said. “Particularly, it cannot be more consumer debt, fuelled by lower underwriting standards.”
The mortgage stress test was introduced alongside new lending guidelines published by the OSFI last year after public and industry consultation.
Since the rollout of the new rules, the Bank of Canada has raised rates three times, by a total of 0.75 percentage points. While Rogers acknowledged the
need to change as the environment warranted, she also said a rise in interest rates isn’t the only factor to take into consideration.
“Borrowers face other risks that can impact their ability to pay their mortgage … Changes to income or changes to expenses other than their mortgage. It’s prudent to have a buffer for these changes as well,” said Rogers, adding that in any case, interest rates are still low by historical standards.
The stress test means Canadians can typically qualify for 20 per cent less borrowing than they could before, said mortgage broker James Laird, who also runs rate-watching website Ratehub.ca. For young people and first-time home buyers struggling to get into the market, that makes home ownership even more of a distant dream, he said. “This has made home ownership 20 per cent less affordable,” said Laird.
“And because rents are also going up so quickly, it’s not like they’ll be able to put away more of a down payment if they just keep renting.”
Laird, who’s also concerned by the rise in borrowing from private lenders not subject to the stress test, estimates those alternative lenders have seen their share of the Canadian mortgage market almost dou- ble in the last year, from 5 per cent to roughly 9 per cent. Private lenders charge higher interest rates than major banks or credit unions.
“I know it’s an unintended consequence of the stress test, but how are people who go to private lenders any better off than they would have been without it? They’re worse off, because they’re borrowing the money anyway, but it’s at a higher rate,” Laird argued.
Mortgage growth has shrunk to a 17-year low in Canada, increasing pressure on the country’s big banks to find business elsewhere.
Relaxing the test — or getting rid of it altogether — would mean we haven’t learned the lessons of the 2008 financial crisis sparked in part by a raft of subprime loans issued in the U.S., warned Rogers.
“Recent history has shown that relaxing bank underwrit- ing standards can lead to extreme and persistent levels of financial instability that more than undo any economic gains they were intended to support,” Rogers said.