Mortgage stress test will remain unchanged amid higher interest rates – National

Mortgage stress test will remain unchanged amid higher interest rates – National

The Office of the Superintendent of Financial Institutions (OSFI) announced as part of an annual review Thursday that the minimum qualifying rate for uninsured mortgages — commonly known to homebuyers and refinancers as the stress test — will not change from its current levels.

The regulator, which is in charge of setting the stress test for uninsured mortgages in Canada says it’s “prudent” to maintain the standard even as high interest rates from the Bank of Canada press borrowers to qualify at higher rates.

What is the mortgage stress test?

Today, those applying for a mortgage have to prove they can handle payments that are higher than their actual contract rate given by their lender. That rate remains 5.25 per cent or the mortgage contract rate plus two percentage points, whichever is higher.

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For much of the COVID-19 pandemic, when the Bank of Canada’s key interest rate was at historic lows, many Canadian borrowers were qualifying at the 5.25 per cent rate.

That’s changed with the central bank’s rapid hikes to its benchmark rate through 2022.

Read more:

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After Canada’s biggest banks raised their prime lending rates to 6.45 per cent in response to the Bank of Canada’s 50-basis-point rate increase last week, the stress test for some Canadian mortgage seekers is hitting above eight per cent.

OSFI’s stress test applies to uninsured mortgages, though the federal Department of Finance has matched the regulator’s qualifying standard on insured products.

Finance Minister Chrystia Freeland said in a statement Thursday that Ottawa’s test for insured mortgages will also remain unchanged.

“Ensuring the stability of Canada’s housing market is essential to protecting Canadians and to upholding Canada’s financial and economic resilience,” she said in a statement.

“We will continue to monitor the housing market and review the insured minimum qualifying rate as warranted.”

Some provincially regulated lenders also do not have to subject borrowers to OSFI’s stress test.

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Click to play video: 'Reaction and mortgage strategy following BOC rate hike'

Reaction and mortgage strategy following BOC rate hike

Why do we have a mortgage stress test?

The goal of the stress test is to protect Canadian borrowers and ensure they can continue to make loan payments amid sudden rises in interest rates or economic downturns.

OSFI said in a brief statement Thursday that while today’s mortgage applicants are already qualifying in a higher rate environment, the stress test remains a “sound” practice for lenders.

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“In an environment characterized by rising mortgage interest rates, sustained high inflation and potential risks to borrower income, it is prudent that lenders continue to test borrowers for adverse conditions,” the statement read.

OSFI also said it will launch a review of the stress test and other mortgage underwriting standards in January. The regulator said it expects to leave the stress test in place after its review, “although the economic environment could result in a more immediate change.”

OSFI has committed to reviewing the stress test annually.

More to come.

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