Canada’s banking regulator will consider new constraints on firms’ mortgage lending in an attempt to protect the financial system, potentially adding more headwinds for the housing market.
Superintendent of Financial Institutions Peter Routledge said a review of the country’s mortgage-underwriting rules that starts later this week will look beyond its current main measure — a stress test requiring borrowers to qualify for higher interest rates than what their banks are offering.
The current, minimum-qualifying rate test has successfully limited the risks to financial institutions from high consumer indebtedness, but it’s not the only tool the regulator has at its disposal, Routledge said at the RBC Capital Markets Canadian Bank CEO Conference Monday.
“The question in our minds is, is it sufficient?” Routledge said of the current stress test. “So we will look at a broader range of debt-serviceability tools, including debt-to-income constraints, debt-service constraints, as well as the current interest-rate stress test tool.”
Bucking pressure to weaken its rules, the Office of the Superintendent of Financial Institutions in December maintained the stress test, which requires borrowers seeking uninsured mortgages to qualify for their loans at a rate two percentage points higher than the bank’s offered rate or 5.25 per cent, whichever is higher.
Canadian home prices fell for a ninth straight month in November, bringing the cumulative price drop from February’s peak to 11.5 per cent. At the same time, interest rates have soared this year as the Bank of Canada seeks to tamp down inflation.