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OSFI finalizes new mortgage rules, including stress test for even uninsured borrowers

Deborah Faria, Broker

Canada’s top banking regulator has published the final version of its new mortgage rules, which include a requirement to “stress test” borrowers with uninsured loans to make sure they could withstand higher interest rates. The Office of the Superintendent of Financial Institutions released new guidelines for the mortgage industry on Tuesday. The rules will be in place Jan. 1. Among the major new rules is a requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo such a test. By law, borrowers with a down payment of under 20 per cent of a home must purchase mortgage insurance. Borrowers pay an insurance premium, but the beneficiary is actually the lender, because the insurance protects the loan giver in the event the borrower defaults on the loan. The vast majority of first-time borrowers have to purchase mortgage insurance, and have been obligated to undergo a stress test of their finances since last year. Anyone who puts down more than 20 per cent of the value of a home doesn’t have to pay such insurance, and is known as an “uninsured” borrower — the people affected by the new rules revealed Tuesday. The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today. According to the Bank of Canada, the big banks currently have an average five-year posted mortgage rate of 4.89 per cent. But it’s not difficult to find a lower rate by shopping around. (Rate comparison website ratesupermarket.ca calculates that many lenders are offering five-year mortgages below three per cent, as does rival RateSpy.com and many others.) The stress test is designed to simulate a borrower’s financial situation by assuming they would have to pay back the loan at the posted average — not whatever deal they were able to negotiate. So under OSFI’s new rules, borrowers would be stress tested at either the five-year average posted rate, or two per cent higher than their actual mortgage rate — whichever one is higher. The regulator published a draft of its new rules over the summer, before consulting with stakeholders about any changes that need to be made. The idea’s critics, including many in the real estate industry, said imposing a stress test on all buyers would put a chill on the housing market at a time that it can ill afford it. But OSFI is pressing ahead anyway with changes it describes as “vigilant.” “These revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Jeremy Rudin, OSFI’s superintendent. In addition to the stress test, the new rules would require lenders to have more scrutiny around the loan-to-value ratio of the loans they give out, to ensure they are not giving out mortgages that are too large compared to the underlying value of the home.Pete Evans · CBC News

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