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Canada’s bank regulator has kept the mortgage stress test unchanged for the third year in a row, saying it will lead to lower loan delinquencies because it ensures that borrowers can handle their payments if interest rates rise.

The Office of the Superintendent of Financial Institutions (OSFI) said the minimum qualifying rate (MQR) for uninsured mortgages would stay at 5.25 per cent, or two percentage points above their actual mortgage contract rate, whichever is higher.

The last time OSFI changed the rate was in mid-2021. At the time, it started scheduling an annual MQR announcement for December and has kept the rate at 5.25 per cent for three announcements in a row.

The bank regulator said the stress test “will lead to lower residential mortgage delinquency and default rates than would otherwise be the case if lenders did not apply the MQR.

“The minimum qualifying rate for uninsured mortgages has produced a more resilient residential mortgage financing system characterized by low default and delinquency rates,” OSFI head Peter Routledge said in the scheduled mortgage stress test announcement.

The requirement has proven to be helpful in ensuring that borrowers had the ability to continue making their loan payments as the Bank of Canada started to raise interest rates in March of 2022.

OSFI reiterated that it expects that lenders will apply the MQR to ensure that borrowers can handle a higher interest rate.

However, the current minimum qualifying rate of 5.25 per cent is pretty much irrelevant given that mortgage rates are around 6 per cent and lenders must test their borrowers at an interest rate two percentage points higher at 8 per cent.

The stress test has made it harder for potential buyers to qualify for a bank loan and that has contributed to the slowdown in home sales.

Mortgage brokers and the real estate industry have been calling on OSFI to relax the standards. They have also been urging the regulator to allow borrowers to skip the stress test if they renew their mortgage with a different lender.

But OSFI recently said that uninsured borrowers must be stress-tested when they switch lenders. OSFI’s rule applies to borrowers who do not need mortgage insurance, which occurs when the buyer has made a down payment of at least 20 per cent of the property’s purchase price.

Buyers who make smaller down payments must pay for mortgage insurance, which protects lenders if the borrower defaults on payments. Insured borrowers are not required to go through the stress test if they switch lenders.

The Finance Department, which is in charge of setting the MQR for insured mortgages, also kept the stress test the same.

Over all, higher borrowing costs have made it difficult for would-be buyers to get a loan that is large enough to buy a property. Because the stress test only applies to chartered banks, borrowers are increasingly seeking loans from alternative lenders, which charge higher interest rates.

Banks accounted for 61 per cent of the new mortgages issued in the second quarter of this year compared with 73 per cent in the first quarter of 2020, according to calculations from the Canada Mortgage and Housing Corp.

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