Canada’s banking regulator conceded to members of Parliament that there’s an “imbalance” in how the mortgage stress test is applied for some homeowners renewing their terms, but stood by the practice.
Peter Routledge, the Superintendent of Financial Institutions, spoke to the standing committee on finance Tuesday. His office, OSFI, is in charge of applying the minimum qualifying rate for uninsured mortgages, colloquially called the mortgage stress test, while the finance minister oversees insured mortgages.
The stress test currently requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher, in order to prove they could handle higher monthly payments if the Bank of Canada’s policy rate rose rapidly. Passing the stress test is viewed as a prudent measure to safeguard lenders offering mortgage loans, but limits the size of mortgage and overall home value an individual can afford.
Routledge was asked for his response to a report from the Competition Bureau in March, which called on OSFI to drop the stress test for Canadians renewing their mortgages. Doing so would make it easier for homeowners to shop around for cheaper rates, forcing lenders to compete more sharply with one another to win business, the competition watchdog argued.
Canadians do not have to re-pass the stress test if they’re re-upping with their existing lender at renewal, regardless of whether they have an insured or uninsured mortgage.
If switching lenders at renewal time, however, the minimum qualifying rate only applies on uninsured mortgages. Insured mortgages are not subject to the stress test when it comes time to renew, something the federal government affirmed in its Canadian Mortgage Charter unveiled last fall.
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High loan-to-value mortgages see homeowners put down less than 20 per cent of the purchase price upfront and therefore require mortgage insurance to cover the higher risk. Uninsured mortgages are available to homebuyers who put more than that amount down.
Routledge acknowledged that it might not seem fair for a homeowner with an uninsured mortgage, who typically has a lower-risk profile than an owner with an insured mortgage, to have to face a higher bar to qualify at renewal.
“If I were a homebuyer facing that, I would feel like it was an imbalance,” he told MPs.
From OSFI’s perspective, Routledge said it is appropriate to go through the full underwriting process anytime there’s “new credit” being issued. This means it’s appropriate to subject homeowners to a new stress test when they’re potentially changing who holds the balance of their loan, just to ensure the applicant is still credit-worthy for a new lender.
But in the case of insured mortgages, the balance of risk is still held by the insurer, Routledge said, meaning there’s no need to re-underwrite the loan.
For that reason, he said OSFI is not currently considering the Competition Bureau’s request to waive the stress test at renewal for uninsured mortgages.
“I acknowledge that there is an imbalance from the experience of a borrower that doesn’t have mortgage insurance as opposed to one that does. It’s an imbalance that we accept because of the sound underwriting principles behind it,” he said.
Routledge went on to say that easing the stress test in some cases could have a cascade of consequences for other lending regulations under the watchdog’s purview.
“If you loosen one underwriting standard, you’d probably have to loosen more, and our mandate calls for us to be fairly vigilant on this,” he said.
Despite saying that OSFI would not waive the stress test at renewal, the superintendent suggested that his office was looking at other ways to rectify the sense of unfairness between mortgage holders.
“I think it is a legitimate challenge to say to OSFI, ‘Can you do something different so that imbalance goes away?’ We are thinking about it, and I do think it’s a fair critique.”
OSFI maintained the mortgage stress test, introduced in 2018, at the current levels at the watchdog’s latest annual decision last December.
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