A representative at the Office of the Superintendent of Financial Institutions (OSFI) mentioned that the use of Canada’s benchmark rate with regards to the stress test is currently being reviewed. What could that mean for Canadian home owners?
Uninsured mortgages with down payments of more than 20 per cent are currently subjected to a stress test. They are tested against a rate higher than the borrower’s contract rate plus 200 bps (benchmark rate, currently at 5.19%). This is done to ensure that the borrower can manage any unexpected change in the financial circumstances, and continue to make mortgage payments.
The 2019 stress test
The series of B-20 mortgage guidelines was originally instituted to cool sales and prices in Toronto and Vancouver. It was meant to reduce risky borrowing and help to balance the real estate market. The B-20 guideline (often referred to as the stress test) falls within the purview of the Office of the Superintendent of Financial Institutions (OSFI). Since its introduction two years ago, there have been many calls from many levels to adjust the stress test, to take into account housing markets vary across Canada.
Recent news from OFSI
In his recent speech Ben Gully, the Assistant Superintendent, mentioned that the use of Benchmark rate in Guideline B-20 stress testing for uninsured mortgages is “not playing the role that was intended”. He stated that the difference between the average contract rate and the benchmark has been widening recently, suggesting that the benchmark is less representative of the market changes than it was thought to be. The use of benchmark rate is hence under review.
Gully was not specific about rates, and adding two per cent or 200 basis points as a qualification for uninsured mortgages will likely not change. According to him, overall the stress test achieved the goal of improving sound mortgage underwriting in banks. It helped to make sure that borrowers could withstand sudden change in circumstances such as loss of income, increased interest rates or additional expenses.
Gully stated that OFSI is taking into account all contrary opinions and is open to introduce appropriate modifications, but currently the value and usefulness of a qualifying rate is undeniable. In addition, the Assistant Superintendent touched on a few more important topics.
- Mortgage renewals:
Current practice for underwriting is that existing lenders don’t have to re-underwrite the loan
during mortgage renewal. This is true for all lenders who make payments appropriately and on time. Gully confirmed that this practice is approved by OFSI, however lenders will be expected to update their risk analysis during renewal.
According to OFSI, combined loan products such as HELOCs are concerning. Some lenders may be taking on more risk than they bargained for with these open-ended commitments. HELOCs can conceal increasing debt loads while payments remain the same. Thus, it is easy for borrowers to take on more risk. OFSI is working with the Bank of Canada to gather data about the potential vulnerabilities of these products, as well as the larger market and economic issues.
Canadian home buyers will likely benefit from a stress test tweak.
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