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Canada's Mortgage Stress Test Remains Unchanged




The authorities in Canada have decided to keep the benchmark of the country's mortgage stress test unchanged. This decision has come at a time when concerns are growing about the housing market which is not close to cooling down at all.


The minimum qualifying rate for uninsured mortgage borrowers will stay at 5.25 per cent, as per the OSFI or the Office of the Superintendent of Financial Institutions. According to this figure, the borrower will be required to pay the benchmark rate in addition to 200 points or 5.25 per cent, whichever is more. It is a known fact that uninsured borrowers must make a down payment of at least a 20 per cent.


In a separate statement the Finance Department of Canada indicated it will also leave the rate for insured mortgages, which fall under its purview, unchanged.


The national average sale price has moved up to 3.5 per cent since June 1 when the OSFI started to bring into effect the current minimum rate as its response to the increased vulnerabilities, which include increase in home prices as well as household indebtedness. The increase in Canadian house prices by almost 20 per cent from what they were last year, heightening concerns about affordability and also invoking fears of a bubble like situation.


Finance Minister Chrystia Freeland's statement said, "Our government is keenly aware that rising housing prices are a real concern, especially for middle-class Canadians hoping to buy their first home. Maintaining the current minimum qualifying rate will ensure prudent underwriting standards for insured mortgages."


In fact, even the assistant superintendent of OSFI's regulation sector, Ben Gully, admitted to the rising household indebtedness, a result of the rising home prices as a "significant vulnerability to lenders and the stability of Canada's financial system." He went on to say that the OSFI is continuously monitoring the risks involved.


There has been only a modest rise in the residential mortgage credit risk while higher loan-to-income ratios have been supported by extremely low rates, as per the OSFI officials (who said this on a media call). They added that more than 90 per cent mortgage borrowers are stress-tested at the rate of 5.25 per cent.


According to OSI, "Mortgages are typically one of the largest exposures that banks carry on their balance sheets. Ensuring that borrowers can continue to repay their mortgage loans strongly contributes to the safety and soundness of Canada’s financial system."


OSFI reviews and communicates the minimum qualifying rate at least every December. Throughout the year, they continue to monitor the appropriateness of the minimum qualifying rate and will make further adjustments, if conditions warrant. And when the rates rise, and the average is higher than 5.25 per cent, the minimum qualifying rate is bound to go up.


If you are a potential borrower who is seeking a mortgage and want to know how the rate affects your chances of getting a good deal, or if you want help with any aspect of your mortgage do not hesitate to contact LendX.

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