OSFI has no plans to loosen the stress test

  9/14/2022 |   SHARE
Posted in Home Buyers by Sam Cuda & Nancy Cuda | Back to Main Blog Page

Despite today’s mortgage borrowers having to qualify at rates in excess of 6% and 7%, Canada’s banking regulator said no changes to the stress test are imminent.

In a speech last week, the head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, threw cold water on the prospect of the regulator making any tweaks to its stress test for uninsured mortgages, or those with down payments of 20% or more.

“The uncertainty and anxiety caused by a rising interest rate environment have, understandably, caused some Canadians to advocate for a loosening of the underwriting standards in Guideline B-20,” he said in his prepared remarks. “Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”

He touched on increased risks in today’s environment, including elevated inflation and the corresponding rapid rise in interest rates to try and bring it back under control.

“Rising policy interest rates will lead to higher debt servicing costs which, combined with heightened inflation, will pressure Canadian households,” Routledge acknowledged.

Among five key actions he said the regulator will take in the year ahead, Routledge said OSFI will “intensify its focus on residential mortgage underwriting due to prevailing conditions in housing finance.”

He said OSFI’s Guideline B-20, which governs mortgage underwriting practices and procedures, “gets an extraordinary amount of public attention,” and that, “we accept this reality – housing is crucial to all Canadians and Guideline B-20, whether we at OSFI like it or not, matters to Canadians. And so, our job is to address concerns with B-20 transparently and forthrightly.”

He did say the regulator will “evaluate” B-20 to “ensure [federally regulated financial institutions’] residential mortgage underwriting meets high underwriting standards.”

“We are constantly evaluating the [Mortgage Qualifying Rate] to measure its efficacy in sustaining sound residential mortgage underwriting as well as the risks of pro-cyclicality,” he said.

Earlier this month, the Toronto Regional Real Estate Board called on OSFI to “weigh in” on whether the mortgage stress test is still applicable in this period of elevated rates.

“Is it reasonable to test homebuyers at two percentage points above the current elevated rates, or should a more flexible test be applied that follows the interest rate cycle?” asked TRREB CEO John DiMichele.

“In addition, OSFI should consider removing the stress test for existing mortgage holders who want to shop for the best possible rate at renewal rather than forcing them to stay with their existing lender to avoid the stress test,” he added.

Source: Canadian Mortgage Trends

First Time Home Buyers, Home Buyers, Mortgage Consumers, Office of the Superintendent of Financial Institutions, OSFI, Stress Test