Last week’s surprise 1% interest rate hike from the Bank of Canada -- its largest since August 1998 -- is sure to shake up the current mortgage landscape. But, along with rising variable rates, there may be another nasty shock for today’s borrowers -- even those who thought they’d beat the time race against the central bank's hiking cycle.
According to a bulletin distributed by Mortgagelogic.news mortgage analyst Rob McLister, Canada’s three largest mortgage insurance providers -- Canada Guaranty, Sagen, and the CMHC -- are allegedly considering whether they will retroactively require recently approved high-ratio variable borrowers to re-qualify post rate hike.
This is due to the fact that the 5.25% threshold for the mortgage stress test, formally called Guideline B-20, has been rendered useless by the BoC’s gargantuan increase; the current criteria requires borrowers prove they can qualify at that rate, or their contract rate plus 2%, whichever is higher.
But, given available five-year variable mortgage rates are now all above the 3.25% range, each and every borrower would need to qualify above 5.25%. Those who squeaked under the wire and passed the stress test in the weeks prior did so with what is now an outdated rate -- and that may not be sitting well with insurers.
“Needless to say, if insurers go this route it could be a nightmare for some insured borrowers who may have already waived financing conditions on their mortgage originator’s advice,” writes McLister in the bulletin.
“Given the reputational risk for insurers, lenders and originators, and the lawsuits that could happen if a borrower can’t close because of this, I’d bet on insurers honouring prior approvals after all. But, it’s too early to confirm.”
In a statement to STOREYS, McLister says that given how many buyers would be impacted, he guesses insurers won’t move ahead with the scheme, and that it remains unclear exactly which files are falling under scrutiny.
Requests for comment from Sagen and Canada Guaranty by STOREYS were not returned by publish time. However, a media representative from CMHC stated, "We are working with our government and industry partners on this question and will communicate further details when available."
As Canada’s mortgage and housing markets have evolved so rapidly this year, there’s been previous speculation that OSFI -- the federal banking regulator that sets the stress test criteria for low-ratio mortgages -- is mulling a change. (The federal Department of Finance, which enforces the stress test criteria for high-ratio mortgages, would emulate any move made by the regulator for the insured borrower group.) While OSFI reviews the stress test criteria annually each December, there’s nothing to stop them from making another, reactionary move.
In a previous interview with STOREYS, Robert Hogue, Senior Economist at RBC Economics, said a tougher stress test “should be on everyone’s radar”. “If the situation warrants it, and OSFI sees some potential concern with federally regulated [financial institutions], there’s nothing stopping it from moving it in June or July,” he said. “That pressure will build and it won’t take that much, really, to see it go up.”
The regulator alluded to as much in their Annual Risk Outlook, released in April; however, while they recently implemented changes for debt ratio restrictions for borrowers taking out Home Equity Lines of Credit (HELOCs), there’s been no formal indication that change is coming for Guideline B-20.
In a statement made to STOREYS in May, OSFI writes that, “Throughout the rest of the year, OSFI continually monitors the Canadian housing market and mortgage practices and may make adjustments at any point if necessary for the health of the Canadian lending industry.”
“We will not speculate about the precise conditions that could prompt a change to the MQR, but we have committed to communicating any changes in a timely and transparent manner.”