Canada’s Mortgage Stress Test Update Put on Hold

Thursday, August 13, 2020   /   by Sergey Korostensky

Canada’s Mortgage Stress Test Update Put on Hold

The Canadian government’s planned tweak to the mortgage stress test was postponed by the COVID-19 pandemic, and officials may not be revisiting the policy in the near future because of the uncertain context.


The Department of Finance and the federal banking regulator originally announced in February that they would make changes to the “floor” of stress tests used to qualify borrowers for insured and uninsured mortgages.


However, as the COVID-19 pandemic began to unfold in Canada, the federal government moved to provide regulatory relief for lenders. In addition, it suspended the adjustments to the stress test that had been planned for April.


Suspended Until Further Notice


The Office of the Superintendent of Financial Institutions (OSFI) announced last month that it would slowly resume policy work in the fall, even though change to its stress test for uninsured mortgages was not explicitly mentioned. In an email to the Financial Post, an OSFI spokesperson stated:



“Currently, the housing market in Canada continues to evolve given the unprecedented conditions brought on by the COVID-19 pandemic. OSFI needs to be sure that consultations on the new proposed B-20 benchmark rate for uninsured mortgages reflects Canada’s new context.”



A spokesperson for the Department of Finance further noted:



“The proposed new benchmark rate for the minimum qualifying rate for insured mortgages remains suspended until further notice. The government continues to monitor the evolving economic conditions, and is ready to act as appropriate to support a stable housing market and the overall economic recovery while safeguarding financial stability.”



Leading Up to the Proposed Change


Before the pandemic, the mortgage stress test adjustments were a hot topic, as there was significant borrower debt among Canadians. The federal government reviewed the issue and planned to implement a new “floor” for qualifying rates on April 6.


OSFI had pointed to an increasing difference between advertised and actual mortgage rates, which the Department of Finance said the adjusted “floor” would help mitigate.


Instead of the five-year benchmark published by the Bank of Canada (based on rates posted by the country’s six largest banks), the new “floor” would look at mortgage-insurance applications and add a 200 basis-point buffer.


Borrowers would then be tested with whichever was higher of the new benchmark or their contract rate, while for uninsured mortgages, it would be the contract rate plus two percentage points.


Of Canada’s six biggest banks, five have decreased their posted five-year fixed mortgage rates to 4.79%. This means the “floor” will likely fall to that rate as well, though it would probably have been lower if the proposed stress test change had been implemented as planned, according to the Financial Post.


Housing Industry Continues Moving Forward


Despite the stress test change being put on pause, for now, the Canadian housing market is showing signs of rebounding after things slowed down early on in the pandemic.


The Canadian Real Estate Association (CREA) hasn’t yet released figures for July but reported that national home sales in June increased 63% on a month-over-month basis, and sales activity (not seasonally adjusted) rose 15.2% compared to the previous year. Newly listed properties jumped 49.5% from May to June, and new supply was 4.8% more than in June 2019.


The Canada Mortgage and Housing Corporation reported that housing starts have also been increasing, with 204,376 units in July, up from 199,778 units the previous month.


As the effects of the pandemic continue to unfold, the federal government appears to have adopted a wait and see approach in regards to any changes made to the mortgage stress test. Still, the housing industry is gaining a stronger foothold as buyers and sellers get back into the swing of things after months of transactions being put on hold.