Bank watchdog keeps rule that’s slowing Canada’s mortgage market

CANADA’S banking regulator maintained the qualifying test it imposes on mortgage borrowers, keeping pressure on the nation’s prospective home buyers.

Borrowers who are applying for uninsured mortgages must go through a so-called “stress test”, officially known as the minimum qualifying rate (MQR), to ensure they can handle a future increase in rates. The MQR will remain the greater of 5.25 per cent or the bank’s contract rate plus 2 percentage points, the Office of the Superintendent of Financial Institutions (OSFI) said in a statement on Tuesday (Dec 12).

Typical mortgage rates at major banks are now between 6 and 7 per cent, meaning home buyers will have to prove they can manage payments on loans with rates of 8 per cent or more. 

Canadian regulators imposed the stress test during a long period of low interest rates to make it harder for borrowers to take on loans they can’t handle. Since the Bank of Canada started aggressively hiking rates last year, property values have fallen and transactions have now slowed to a crawl.

Still, Canada’s struggling housing market has so far seen relatively little financial distress among borrowers, which can in part be attributed to the stress test, according to OSFI’s top executive. 

“The minimum qualifying rate for uninsured mortgages has produced a more resilient residential mortgage financing system characterised by low default and delinquency rates,” Peter Routledge, the financial superintendent, said in a statement. “This discipline contributes to the resilience of Canada’s financial system.”

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With rates so much higher than they were two years ago, some in the real estate industry have been calling for an end to or loosening of the stress test to alleviate housing affordability, which has fallen to multi-decade lows.

“The minimum qualifying rate provides a buffer for home buyers and protects Canadians from changing economic circumstances, including increased interest rates and unforeseen personal circumstances,” Finance Minister Chrystia Freeland said in a statement.