The head of Canada’s banking regulator said he’s worried about how higher borrowing rates will affect Canadian households, and also relieved that the country’s mortgage stress test was strengthened one year ago.
“If you're asking, ‘Are you worried as rates continue to rise, that will put stress on Canadian households,’ yeah, we're very worried about that. And we're constantly looking at what we can do to add a bit more resilience into the system,” said Peter Routledge, the head of the Office of the Superintendent of Financial Institutions (OSFI), in an interview Tuesday.
It was effective June 1, 2021 that OSFI raised the bar for its minimum qualifying rate for uninsured borrowers (ie, those who make a down payment of at least 20 per cent), requiring them to prove they could handle mortgage payments of either 5.25 per cent or their contract rate plus two percentage points – whichever was higher. The regulator also built in a yearly review of the test as part of the framework.
It’s a move that Routledge said is now paying off.
“We did tighten the stress test a little bit a year ago, and I'm glad we did in light of what we saw with interest rates over the last couple of months. I mean, I think that (move in interest rates) was unexpected but it was good that we had that margin of safety to deal with that,” he said.
Routledge pointed to data from the Canadian Bankers Association that show only 0.15 per cent of mortgages in Canada were in arrears as evidence of the resilience of household finances.
However, despite extremely low mortgage arrears, financial sector stability has been top of mind as home prices have fallen and interest rates have jumped.
OSFI announced Monday that it will tighten the rules for certain types of real estate loans such as reverse mortgages and home equity lines of credit to further protect households from rising rates. For borrowers whose combined loan is higher than 65 per cent of the home’s value, part of their payments will go towards the principal rather than just interest owed, as of late 2023.
As for the mortgage stress test, the regulator will be taking a close look at the qualifying rates and whether adjustments need to be made before its currently-scheduled review at the end of the year.
“We look at it at the end of every year in December, and we'll do that per the normal course this December and if we think more rapid change is required, we can always do that. And we'll try and be as transparent with that as possible,” Routledge said.
“But for right now, we're on schedule to review the mortgage stress test in December. We'll give it a clear-eyed look and make sure it adds to the resilience of the Canadian housing system.”