Canada’s top federal banking regulator says a stress-test for uninsured mortgages is “working,” but that it is still keeping an eye on lending practices.
The Office of the Superintendent of Financial Institutions published an information sheet on Monday for its B-20 guideline, which covers residential mortgage underwriting practices.
A revision to the guideline came into effect at the start of 2018 and included a minimum qualifying rate for mortgages not insured against default. The rate is set at whichever is higher: the Bank of Canada’s five-year benchmark rate or the rate on a borrower’s contract plus two percentage points.
“The revisions to B-20 are working; strengthening mortgage underwriting across Canada and improving the resilience of the Canadian financial system to future shocks,” OSFI’s information sheet said. “While improvements have been made OSFI will continue to monitor lender practices, particularly in the area of income verification, and will be proactive with lenders when it identifies areas requiring attention.”
OSFI said the updated guideline was intended to tackle growing risks amid low interest rates and housing market imbalances, but the stress test has faced pushback from the real-estate industry and concern from some politicians.
The president of the Toronto Real Estate Board said earlier this month that sales activity was still below the longer-term norm, “as potential home buyers come to terms with the OSFI mortgage stress test and the fact that listings continue to be constrained relative to sales.”
Reports in April from the economics units of Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank also found the B-20 update had weighed on markets, with the latter study saying the guideline had driven down the number of Canadian home sales by approximately 40,000 between the fourth quarter of 2017 and the fourth quarter of 2018.
Yet OSFI said in its Monday update that federally-regulated lenders have been approving fewer mortgages for “the most highly indebted or over-leveraged borrowers,” with the fraction of new uninsured loans topping 450 per cent of a borrower’s income levelling off at 14 per cent, down from a peak of 20 per cent.
As for concerns that the stress test could throw up roadblocks to borrowers getting a competitive renewal rate, OSFI said its data shows “the difference between renewal and new mortgage rates for uninsured five-year fixed and variable rate mortgages has remained largely unchanged” since the new B-20 kicked in.
The regulator has said it would provide periodic updates, an OSFI spokesperson said Monday, with the information sheet following a speech by an assistant superintendent in February that defended the stress test.
In May, the CEO of the Canada Mortgage and Housing Corp . wrote to a parliamentary committee that the stress test “is doing what it is supposed to do.”
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