Canada keeps mortgage stress test benchmark unchanged despite hot housing market

Toronto

CANADIAN authorities left the benchmark for the country's mortgage stress test unchanged on Friday (Dec 17), despite growing concerns about a red-hot housing market that shows no sign of cooling.

The Office of the Superintendent of Financial Institutions (OSFI) said the minimum qualifying rate for uninsured mortgage borrowers will stay at 5.25 per cent. This makes the benchmark either the rate the borrower pays plus 200 basis points, or 5.25 per cent, whichever is greater.

Uninsured borrowers are required to make at least a 20 per cent down payment.

Canada's Finance Department said separately it too will leave the rate unchanged for insured mortgages, which fall under its purview.

The S&P/TSX banking index fell 0.4 per cent on the Toronto Stock Exchange, compared with a 0.3 per cent increase in the broader benchmark.

Since June 1, when OSFI began enforcing the current minimum rate in response to increased vulnerabilities, including rising home prices and household indebtedness, the national average sale price has increased 3.5 per cent.

Canadian house prices are up nearly 20 per cent from a year ago, setting a record in November, exacerbating affordability concerns and stoking fears of a bubble.

"Our government is keenly aware that rising housing prices are a real concern, especially for middle-class Canadians hoping to buy their first home," Finance Minister Chrystia Freeland said in a statement.

Ben Gully, assistant superintendent of OSFI's regulation sector, acknowledged that rising household indebtedness resulting from surging home prices is a "significant vulnerability to lenders and the stability of Canada's financial system", and said the regulator continues to monitor risks.

Residential mortgage credit risk has risen only modestly and higher loan-to-income ratios have been supported by extremely low rates, OSFI officials said on a media call.

More than 90 per cent of mortgage borrowers are stress-tested at the 5.25 per cent rate, they said.

James Laird, co-founder of mortgage comparison website Ratehub.ca, said the qualifying rate is still about 2.5 percentage points higher than the best home loan rates available.

"The only reason to push it higher would be if they're forecasting inflation will push rates significantly higher by the time mortgages are up for renewal in 5 years", which is not what the Bank of Canada is forecasting, he said.

Although more than half of new loans in recent months have been variable-rate mortgages susceptible to interest rate increases, about three-quarters of total outstanding mortgages in Canada are fixed.

"If and when posted rates rise, such that the formula creates an average higher than 5.25 per cent, the (minimum qualifying rate) will rise naturally," Laird added. REUTERS