Canadian financial regulator, the Office of the Superintendent of Financial Institutions (OSFI) has proposed to make modifications in its stress test. The aim of OFSI is to protect depositors, policyholders, financial institution creditors and pension plan members, while allowing financial institutions to compete and take reasonable risks. The stress test is a test which determines the capability of the borrower to afford the mortgage and is calculated on the basis of the minimum qualifying rate of the lender.
According to the recent announcement made by the OFSI, it is destined to raise the current test level to 5.25 per cent for uninsured borrowers (as against the current rate of 4.79%) which will be two percentage points more than the market rate. The OSFI is under the process of soliciting submissions from stakeholders till May 7, 2021, in order to put into effect the new rules from June 1, 2021. Once OSFI gets inputs from stakeholders, it will communicate the final amendments to the qualifying rate for uninsured mortgages in Guideline B-20 by May 24, 2021. This proposal was made amid rising concerns that the initial measures (in Feb 2020) could stimulate the housing market further. This proposal also comes on the heels of increase in the average price of Canadian homes by a whopping 25 per cent till February end.
This is a departure from the initial February 2020 plan which was stalled just a month post its announcement because of the Covid-19 pandemic that took the world in its grip and shook economies. The stress test was first executed in 2018 when it was a measure taken to bring in a certain sense of stability on the housing market. In August 2020, the Bank of Canada had reduced its 5-year conventional mortgage rate from 4.94% but this step had to be reversed due to continuous high demand of the housing market.
You may wonder what does this announcement imply for the borrowers? It simply implies that they will need to prove their affordability to pay off the loan at a higher rate irrespective of what the lenders are willing to lend them at. In other words it will become increasingly tough for borrowers to qualify for home loans. When this happens the number of qualifying borrowers will be checked and will result in lowering the trend of rising prices of the housing market. In other terms it will help in cooling down the overheated housing market
While making the announcement the official statement by OFSI said, "The current Canadian housing market conditions have the potential to put lenders at increased financial risk. OSFI is taking proactive action at this time so that banks will continue to be resilient.”
Additionally, OSFI also made public its proposal to revisit the calibration of the qualifying rate at least once a year. This would be done to ensure it remains appropriate for the risks in the environment.
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