It was a move that came as little surprise to Canadian mortgage professionals and market observers: the national banking regulator’s decision to leave the mortgage stress test rate, which safeguards the market’s stability, unchanged in December.
The Office of the Superintendent of Financial Institutions (OSFI) opted to keep the minimum qualifying rate for uninsured mortgages at the greater of 5.25%, or two percentage points above the contract rate, a move that was quickly repeated by federal finance minister Chrystia Freeland on the insured side.
While OSFI superintendent Peter Routledge has routinely emphasized the stress test’s importance to the mortgage market, he also conceded in September that the measure was an “imperfect” and “incomplete” means of testing borrowers.
That verdict arrived amid a spike in variable-rate mortgage costs since 2022 following a series of Bank of Canada rate hikes, although Routledge underscored that the stress test had been an effective means of ensuring borrowers were able to absorb the impact of those higher payments.
Regulator urged to introduce stress test changes
Few expected the regulator to introduce significant changes to the stress test in December – but OSFI has still faced calls in recent times to adjust the qualifying rate as a means of improving housing affordability in Canada.
Amidst plunging homebuilder sentiment and growing pessimism on prospects for new buyers, the Canadian Home Builders’ Association (CHBA) recently argued a lower stress test rate would help get Canadians into homes and improve the outlook on the home construction front.
Kevin Lee, CHBA’s chief executive officer, told Canadian Mortgage Professional that a cut in the qualifying rate, coupled with an emphasis on longer mortgage terms, should be under serious consideration by OSFI.
“We know why it’s been put in, and we know that OSFI has been really reticent to make any changes in the name of financial stability, but when you look at all the data it would suggest that too much has been done,” he said.
“We’ve been big proponents of not only ratcheting the stress test down a little bit overall, but trying to encourage longer-term mortgages – which is something that the Bank of Canada has encouraged in the past as well. Moving to seven- and 10-year mortgage terms would enable buyers to be that much more stable when they come out of their mortgage terms and they look to renew.”
Lee said eliminating the stress test for those longer mortgage terms could have a positive knock-on effect on the housing starts front while also maintaining the stability of the market as a whole.
“If we’re going to look to double housing supply, people need the financial means to be able to get into the marketplace, and we have to decide what we want in the mortgage space,” he said.
“I think there’s a lot of room for walking back a little bit on some of this excess tightening in the name of having more homeowners be able to be in the market while still having a very stable and sound financial system for Canadians.”
Borrowers continue to bear the brunt of high rates
While home prices have dipped across many Canadian markets in recent months, high interest rates and the stress test have kept affordability firmly out of reach for scores of buyers.
Recent research by Ratehub.ca showed that the income required to purchase a home jumped on a yearly basis across nine of 10 major markets in January based on a stress test rate of 7.37% (two percentage points above a 5.37% mortgage rate).
Still, the Bank of Canada has also highlighted that the stress test has played an important role in mitigating the impact of rising borrowing costs in recent years, and will continue to serve as an important tool in the face of potential mortgage renewal pain.
“Most borrowers will need to make adjustments, sometimes significant, to ensure they are able to continue to pay their mortgage,” the Bank reported in December. “The impact on financial stability, however, is somewhat mitigated by macroprudential policy.”
The stress test, the central bank said, “should provide a buffer for [most] borrowers to absorb interest rate increases and other shocks.”