OSFI doesn’t plan to soften the current mortgage stress test

While today’s mortgage borrowers need to qualify at rates as high as 6% and 7%, the Office of the Superintendent of Financial Institutions (OSFI) still doesn’t plan to impose any changes to the stress test in the nearest future.

Last week, the head of the OSFI, Peter Routledge, denied any possibility of easing the stress test both for insured and uninsured mortgages.

“I understand why today’s uncertainty and anxiety caused by growing interest rates, made some Canadians call for a loosening of the underwriting standards in Guideline B-20,” – he said. “However, let me assure you it’s not going to happen.”

He pointed to higher risks in the current environment, including sharp inflation growth and the corresponding significant rate increases aimed at taking it back to the target level.

“Growing interest rates will cause higher debt servicing costs which, combined with increased inflation, will pressure Canadian households,” – Routledge admitted.

According to him, one of the five key measures OSFI will take in 2023, will be “intensifying the focus on residential mortgage underwriting due to prevailing conditions in housing finance.”

OSFI’s Guideline B-20, which controls mortgage underwriting practices and procedures, “receives an extraordinary amount of public attention,” Routledge said. “We accept it – real estate is extremely important for all Canadians and Guideline B-20, whether OSFI likes it or not, is important for Canadians. That’s why our task is to address concerns with B-20 transparently and immediately.”

He noted that the OSFI will actually “evaluate” B-20 to “make sure that federally regulated financial institutions’ residential mortgage practices meet high underwriting standards.”

“We are systematically evaluating the Mortgage Qualifying Rate in order to assess its efficacy in keeping sound residential mortgage underwriting as well as the risks of pro-cyclicality,” – he added.

Earlier this month, the Toronto Regional Real Estate Board (TRREB) suggested the OSFI should consider whether the mortgage stress test remains applicable amid the environment of elevated interest rates.

“Is it reasonable now to qualify homebuyers at 2% above the current elevated rates, or should we apply a more flexible test which would follows the interest rate cycle?” – asked TRREB CEO John DiMichele.