Finance Department toughening up the stress test on insured mortgages, following the lead of OSFI

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Ottawa has joined the country’s bank regulator in toughening up borrowing requirements for homebuyers on the same day the Bank of Canada warned that growing household debt has become a risk to the economy again.

The Finance Department announced on Thursday that it will follow the Office of the Superintendent of Financial Institutions (OSFI), which finalized its stricter mortgage stress test.

Starting in June, borrowers will have to prove they can make mortgage payments at an interest rate of 5.25 per cent instead of the current threshold of 4.79 per cent. The rule requires lenders to stress test borrowers at the greater of 5.25 per cent or two percentage points above their contracted rate.

Policy makers have been under pressure to slow the overheated housing market. The average selling price of a home is more than 30 per cent higher than a year ago, thanks in part to low borrowing costs. The new rules are not expected to have much effect on home prices.

Finance Minister Chrystia Freeland said the rapid rise in home prices raises concerns about the stability of the overall market. Earlier on Thursday, the Bank of Canada said household indebtedness and the real estate boom were among the top risks to the economy.

OSFI has estimated that the higher qualifying rate would reduce the maximum mortgage a borrower could take on by 2 per cent to 4 per cent, if the loan’s amortization period remains the same.

The Finance Department did not immediately respond to a question on how the new rule would affect borrowers who require mortgage insurance. Borrowers require mortgage insurance if they make a down payment less than 20 per cent of the property’s purchase price.

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