Canadian homebuyers will face updated mortgage stress test on Friday

Potential homebuyers will soon find out what requirements of mortgage stress testing they will have to face.

On Friday, the Office of the Superintendent of Financial Institutions (OSFI) will provide an update on the minimum qualifying rate for uninsured mortgages.

Today, homebuyers with a down payment of at least 20% have to prove they’ll be able to service their mortgage debts at their contract rate plus 2% or 5.25% (the higher one is chosen).

The same requirements apply for buyers who put down less than 20%. However, those rules for insured mortgages are determined by the finance department.

The stress test, known as rule B-20, was introduced at the beginning of 2018. It aimed at ensuring prudent mortgage underwriting practices, when worries over growing household debts and home prices were rising in Canada’s certain large real estate markets.

Before that, OSFI noted to lenders in 2016 that they need to “engage in prudent underwriting” practices.

Today’s qualifying rate was adjusted to the current level in June. Earlier, borrowers had to qualify at the higher of their contract rate plus 2%, or the central bank’s five-year rate of 4.79%.

“We need to make sure that lenders have borrowers who are able to keep servicing their mortgages in case we get back to pre-pandemic interest rates and financial conditions,” – explained then-Superintendent Jeremy Rudin in April.

The possibility of higher rates has really intensified this week both in Canada and other countries, with the world’s major central banks focusing on inflation that have reached record high levels.

On Wednesday, the Bank of Canada Governor Tiff Macklem said the Bank “is getting closer” to leaving its existing guidance, which means rates will probably remain unchanged until the middle quarters of 2022.

At the same time, the U.S. Federal Reserve stated on Wednesday that it may raise its benchmark rate three times in each of 2022 and 2023.

On Thursday, the Bank of England surprised everyone by increasing its key rate from 0.1% to 0.25% in attempt to restrain the inflation that it expects to grow to 6% next year.

 

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