Could some relief potentially be on the horizon for today’s beleaguered mortgage borrower? Given today’s applicants are facing some of the toughest borrowing conditions in years, there is a possibility that Canada’s banking regulator may ease up on the current mortgage stress test.
According to the Globe and Mail, OSFI Deputy Superintendent of Supervision Ben Gully stated to reporters that the banking regular could indeed open the door to a review of the stress test’s criteria, given how dramatically borrowing conditions have changed in recent months.
“If conditions change, we reserve the option to come back more frequently than annually and that is very much part of our approach and indeed that’s true of any piece of guidance we have at OSFI,” he said.
“We’re continually reviewing it, their applicability and, if conditions warrant, we would obviously move off cycle to address them.”
The current stress test -- known officially as Guideline B-20 -- requires that all new mortgage borrowers either qualify at a rate of 5.25%, or their contract rate plus 2%, whichever is higher. However, given that soaring bond yields have pushed fixed rates considerably higher -- the big banks all hit a threshold of 4.39% for five-year fixed terms this week -- most borrowers are well exceeding that 5.25% threshold, and are now being stress tested close to 7%.
This qualifying rate is reviewed every December, with the next set for December 15th, 2022.
A spokesperson for OSFI told STOREYS that “We will not speculate about the precise conditions that could prompt a change to the [Mortgage Qualifying Rate], but we have committed to communicating any changes in a timely and transparent manner.”
“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.”
“Too Big of a Negative Impact”
James Laird, COO of Ratehub.ca, told STOREYS there are a number of factors that will lead OSFI to tweak their stress test criteria by the end of the year, particularly inflation growth, and the rate hikes that will need to occur in order to reign it in.
“I think they’re showing concern about that having too big of a negative impact on the housing market and then they’re giving us early insight,” he says. “The stress test really came from a place of ultra low rates and concern that people were overextending themselves and borrowing too much, and so they’re probably starting to think that, ‘Hey, we don’t have that concern as much anymore, and we might be switching our area of concern to the rising rate environment causing too much of a U-turn in the housing market.’ They’re saying, ‘Look, if rates are getting to 5 or 6, maybe we don’t want people to have to qualify at 7 or 8.’”
The last time OSFI changed the stress test qualifying rate was June 1, 2021; at the time, discounted five-year high-ratio fixed rates could be had for 1.68%, compared to 3.49% today, says Laird.
Given that, it’s now easier today to qualify for a variable-rate mortgage than it is a fixed, a fact he says is “illogical”.
“I imagine they’re working to change that right now. And then could they reduce it by 1%? Possibly. “They could reduce it, they could take it away altogether for five-year or longer fixed terms, or they may simply make it so variables are not the easiest ones to qualify for.”
According to the Canada April 2022 Housing and Mortgage Market Review from Mortgage Professionals Canada, today’s variable rates are priced nearly 150 bps below five-year fixed, which has greatly incentivized borrowers to choose floating-rate options. Variable mortgages now account for 55% of all new mortgages taken out, and nearly 30% of all mortgage debt outstanding overall -- that’s up from just 18% in 2020.
And, as bond yields continue to rally higher, so too will fixed rates. As Laird points out, the big banks are steadily increasing day by day.
“Scotia moved up again last night into the high 4s, so we’re approaching a 7% stress test pretty rapidly right now,” he says.