As the effects of the mortgage stress test are becoming more apparent, pressure is mounting on the Office of the Superintendent of Financial Institutions (OFSI) to ease up these mortgage requirements that force all mortgage borrowers, including those renewing or refinancing, to qualify for a mortgage debt that is 200 basis points above the discounted rate.
The stress test’s stated purpose was to curtail risky lending and ensure that new borrowers could continue their mortgage payments in the event of a recession, rising rates or economic hardship. Under current rules, borrowers need to prove they have the ability to pay their mortgage payments at an interest rate that is 2% higher than the discounted mortgage rate offered by their lender.
As the sole regulator of Canadian banks, and the main regulator of insurance, trust, and loan companies in Canada, OFSI has the responsibility of monitoring and evaluating the entire financial sector and enact or amend regulations which would benefit the entire market. As such, OSFI introduced the mortgage stress test on January 1, 2018, in an effort to curtail the overheated housing markets that were primarily in Greater Toronto and Greater Vancouver.
Now, a year later, the mortgage stress test is considered a major factor in the current slow down of the housing market and, as a result, a key contributor in the low number of home sales across Vancouver and Toronto.
Leading critics such as the Chief Economist for the Mortgage Professionals of Canada, Will Dunning, and CIBC’s Deputy Chief Economist, Benjamin Tal, are not opposed to the idea of a stress test. However, they claim its current implementation is unnecessarily harsh, blunt, and lacking nuance when considering a borrower’s ability to fulfil his or her mortgage obligations.
“It’s not something that has to be set in stone. It should be more dynamic,” explained Tal in an earlier interview. “You have to assess the damage to the housing market, whether that damage is too severe, and what other forces in the market are leading to slower growth.”
While most banks were initially supportive of the test, more and more banks want the test to be adjusted so that it meets current slower market conditions.