Canada’s banking regulator has proposed changes that would strengthen the test applied to uninsured mortgages.
Here’s a look at what buyers would be facing starting in June:
- Requires borrowers applying for uninsured mortgages – typically those with more than a 20% down payment – to qualify at their mortgage contract rate plus two percentage points or 5.25%, whichever is higher
- Calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment
The stress test currently has a minimum qualifying rate of 4.79% – nearly 50 basis points lower than the new proposal.
Why Change Now?
The higher floor rate is based on an average of the qualifying rate in the preceding 12 months leading up to the pandemic, adding that financial markets must be prepared for a return to pre-pandemic conditions—i.e., higher interest rates.
According to OSFI Superintendent Jeremy Rudin, the regulator is concerned about market conditions, which elicited this warning to lenders in OSFI’s statement: “OSFI will be looking for heightened vigilance from FRFI lenders in applying the principles of Guideline B-20 related to collateral management, income verification and debt servicing, combined Mortgage-HELOC loan plans and risk governance.”
Reaction to the Changes
Many have stated their reluctance to the proposed changes, citing that increasing the qualifying rate by another 50 basis points will only disqualify more aspiring middle-class Canadians and would-be first-time home buyers.
OSFI is expected to communicate some of that feedback and any final amendments to the qualifying rate by May 24, 2021, prior to the new stress test taking effect on June 1, 2021.
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