The spike in mortgage rates has made it harder for Canadian borrowers to qualify for a mortgage.Ammar Bowaihl/The Globe and Mail
Canada’s bank regulator says it will not exempt uninsured borrowers from the mortgage stress test if they switch to a different lender at renewal time, a rule that has made it onerous for home owners to find a new lender and take advantage of cheaper interest rates.
Calls from the real estate industry for the Office of the Superintendent of Financial Institutions (OSFI) to relax the stress test have been growing, as the spike in mortgage rates has made it harder for borrowers to qualify for a mortgage.
But the OSFI said on its website Monday that “the new lender must do its own due diligence as it will own the credit risk for an uninsured loan.” The comments were released as part of the bank regulator’s response to industry’s broader concerns about potential new lending rules.
The stress test has two thresholds: a minimum qualifying rate, or MQR, that is set by the regulator and an interest rate that is two percentage points higher than the borrower’s mortgage contract. The lender must use the higher interest rate to stress test the borrower.
Since the MQR is currently set at 5.25 per cent, it is effectively obsolete because mortgage rates are above that level at around 6 per cent and borrowers are stress tested at two percentage points higher at 8 per cent.
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“When a borrower opts to switch lenders, a new loan is created,” OSFI said. “We therefore expect that the loan be fully underwritten, including application of the MQR for uninsured mortgages to assess debt affordability.”
A borrower does not need mortgage insurance if they make a down payment that is at least 20 per cent of the property’s purchase price.
However, insured borrowers, or those who have had to buy mortgage insurance, are allowed to switch lenders without being stress tested. OSFI said they are exempt because their credit risk has been transferred for the life of the loan to the mortgage insurer, which pays the lender if the borrower defaults on monthly payments.
(A borrower must buy mortgage insurance if they make a down payment that is less than 20 per cent of the property’s purchase price. The insurance protects the lender against losses if the borrower defaults on payments.)
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The regulator said exempting all renewals from the stress test “could cause lenders to compete for loans that do not meet OSFI’s expectations.” However, it said it would monitor for evidence of uncompetitive rates for those who cannot switch lenders and would “take action if warranted.”
OSFI has been rolling out proposals and consultation papers to further strengthen banks, which already face the most stringent rules amongst lenders. The sharp rise in interest rates has exposed issues with popular mortgage products.
OSFI’s mortgage rule proposals were unveiled in January. At the time, OSFI had asked whether an amortization limit should be used to qualify for a mortgage with the aim of curtailing excessive leverage.
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The regulator suggested that it may require lenders to add another component to the stress test and add a qualifying amortization period, or the length of time a borrower has to pay down their mortgage. It said this could be done in conjunction with debt service metrics, which evaluate a borrower’s ability to pay their mortgage loan and all other expenses.
“We believe there is merit in lenders applying an explicit, qualifying amortization limit and we will continue to evaluate this proposal,” OSFI said. It is not clear whether the regulator would proceed with this idea, and it did not say when it would issue new rules.
Rachelle Younglai