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Noah Zivitz

Managing Editor, BNN Bloomberg

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Would-be homebuyers are about to find out what the future holds for the country’s mortgage stress testing requirements.

The Office of the Superintendent of Financial Institutions (OSFI) will release an update on the minimum qualifying rate for uninsured mortgages on Friday. 

As it stands, homebuyers who put down at least 20 per cent up front are required by OSFI to show they’ll be able to service their obligations at their mortgage contract rate plus 200 basis points or 5.25 per cent, whichever is higher. 

The same parameters apply for those who put down less than 20 per cent up front, but those rules for insured mortgages are set by the finance department. 

The stress test (also known as rule B-20) first came into effect at the start of 2018, and was designed to ensure prudent mortgage underwriting practices at a time when concerns were mounting about household indebtedness and surging home prices in some of the country’s largest housing markets.

Prior to the stress test’s implementation, OSFI had put lenders on notice in 2016 that it expected them to “engage in prudent underwriting” practices. 

The qualifying rate was adjusted to the current threshold in June of this year. Previously, borrowers were forced to qualify at the higher of their contract rate plus 200 basis points, or the Bank of Canada’s five-year rate of 4.79 per cent.

“We want to make sure that lenders will have borrowers who are able to continue to service those mortgages if we have a return to interest-rate and financial conditions that are more representative of the pre-pandemic era,” said then-Superintendent Jeremy Rudin in an interview last April. 

While Rudin indicated the regulator is looking to gird against vulnerabilities to pre-pandemic interest rate levels, there is some speculation borrowers could face rates not seen since before the Great Financial Crisis. Scotiabank Economics, for one, has forecast eight rate hikes by the end of 2023, which would bring the benchmark rate to 2.25 per cent, well above the 1.75 per cent peak post-financial crisis.

And that rising rate environment has one prominent mortgage expert declaring he would not be shocked to see OSFI raise the qualifying rate. In an email to BNN Bloomberg, mortgage analyst Rob McLister said that while consensus appears to be no change, he would not be surprised by a 15 to 45 basis point increase, and that regulators may appear “asleep at the wheel” if they don’t take action based on the current market conditions.

“The government must do something to cool all these imbalances until housing supply catches up. Raising the MQR is the easiest thing they could do,” he said.

“If they don't lift it at least nominally, they'll take flack for being asleep at the wheel.”

Indeed, the possibility of higher interest rates has been reinforced this week at home and abroad as the world’s major central banks take aim at inflation rates that have risen to multi-decade highs. 

On Wednesday, Bank of Canada Governor Tiff Macklem told reporters the central bank “is getting closer” to moving off its existing guidance, which has suggested rates won’t rise until the middle quarters of next year. 

Meanwhile, the U.S. Federal Reserve indicated Wednesday it could raise its benchmark rate three times in each of 2022 and 2023. 

And, on Thursday, the Bank of England surprised markets by raising its key rate to 0.25 per cent from 0.1 per cent as it braces for inflation that it believes will peak at six per cent next year.

With files from BNN Bloomberg Producer Ian Vandaelle