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The federal financial-system regulator responsible for creating Canada’s mortgage stress tests says the rules are “working,” countering repeated calls from the industry for reform.
“Since the B-20 revisions were put in place, lenders are approving fewer mortgages for the most highly indebted or over-leveraged borrowers,” reads a statement the Office of the Superintendent of Financial Institutions (OSFI) issued this week.
Guideline B-20, which became policy in January 2018, included a so-called stress test for uninsured mortgage applicants. The test requires borrowers with downpayments of 20 percent or more to qualify a rate that is 2 percentage points above their contract rate.
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To obtain a five-year fixed-rate mortgage at 3 percent, for example, a borrower would have to show they could afford to keep up with monthly payments at 5 percent.
The OSFI guidelines only apply to federally regulated lenders, but these, which include Canada’s big banks, account for about 80 percent of residential mortgages.
Similar testing already had existed for insured mortgages. Borrowers who can’t muster a downpayment of at least 20 percent require mortgage insurance and have faced stress testing since 2016.
Since the B-20 rules came into effect, the OSFI notes that riskier mortgage originations have fallen. “The proportion of new uninsured mortgage loans that exceed 450 percent of a borrower’s income has stabilized at a lower rate of 14 percent, from a peak of 20 percent,” the statement continues.
The federal regulator also addressed its much-criticized decision to require existing mortgage borrowers to face the test again if they want to switch lenders at renewal. Mortgage Professionals Canada has suggested the rule might help banks take advantage of some borrowers.
“The concern is that since this could prevent some renewing borrowers from switching lenders, they could be trapped at their current lenders, and the lenders could exploit the situation and charge them at a higher interest rate than would otherwise be available,” economist Will Dunning writes in a report for the industry group. He also notes that generally incomes go up over time,
But the OSFI says it’s only responsible for new lenders to apply the stress test to these borrowers. “If a borrower decides to change lenders, the new lender must act responsibly by following their own established underwriting standards,” the OSFI says. “Business models and risk tolerances are different across lenders; it is not responsible for lenders to rely on the past underwriting standards of another lender.”