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Canada’s banking regulator confirmed today it will leave the mortgage stress test for uninsured mortgages unchanged.

In its annual review of the minimum qualifying rate (MQR) used by federally regulated lenders, the Office of the Superintendent of Financial Institutions (OSFI) said the MQR has provided a margin of safety to mortgage borrowers and has better prepared them in dealing with rising rates over the course of the year.

“This margin of safety made it easier for Canadian homeowners to continue to pay their mortgages and stay in their homes when rates started rising,” Tolga Yalkin, Assistant Superintendent at OSFI, said during a media call.

He added that the MQR is one of the reasons residential mortgage defaults remain near historic lows.

“In an environment characterized by sustained high inflation, rising mortgage interest rates, and potential risks to borrower incomes, it’s prudent that lenders continue to test borrowers for adverse conditions,” he said.

While today’s decision was expected, there have been growing calls for OSFI to revisit how the mortgage stress test is applied. With interest rates for uninsured mortgages⁠—those with a down payment of at least 20%⁠—nearing 6%, it means new borrowers at federally regulated lenders must prove they can afford payments based on an interest rate of nearly 8%.

OSFI was asked if there’s a concern that the more challenging qualification conditions may drive more homebuyers—who otherwise qualify at today’s contract rates—to alternative lenders, which generally come with higher mortgage rates.

“When we consider the basis of the MQR, we’re really looking at the risks to the financial institutions that we regulate,” Yalkin said, “ultimately with the aim of protecting borrowers and creditors and their interests and rights.”

OSFI to launch B-20 consultation process in January

OSFI also announced that it will launch a consultation process on its Guideline B-20, which governs mortgage underwriting practices and procedures.

“Part of us issuing the consultation document is to seek perspectives from stakeholders on a wide range of debt serviceability measures and the options that may exist and the nuances in terms of their application,” Yalkin said.

OSFI said it will seek input from stakeholders on a variety of considerations relating to debt serviceability measures prior to issuing revised guidelines later in the year.

OSFI was asked if revisions to the guidelines could include how the stress test is applied to existing homeowners that are wanting to switch lenders.

“When we do launch this consultation, although we have some thoughts on how to proceed, we definitely are open to a range of perspectives that stakeholders may have to offer,” Yalkin said.

Mortgage Professionals Canada is one such stakeholder that has been calling for changes to how the stress test is applied.

“Mortgage Professionals Canada has advocated for the removal of the stress test on mortgage transfers, renewals and switches, provided that there is no change to the principal, by highlighting the disadvantages to consumers in a high rate environment, as well as other measures that will help ease the cost burden to Canadians in this high-interest, high-inflation environment,” said MPC president and CEO Lauren van den Berg. “We will continue to consult with OSFI and other stakeholders to ensure our industry is heard during this review process.”

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