Regulator's move is a welcome positive for the market, according to market players
The recent decision by the Office of the Superintendent of Financial Institutions (OSFI) to maintain the mortgage qualifying rate for Canadian banks is a welcome positive that helps reinforce credit stability, according to Fitch Ratings.
In its analysis, Fitch said that OSFI’s move is consistent with the regulator’s stated commitment to tightening regulations and capital requirements, which will help mitigate the myriad capital and solvency risks that Canadian banks are facing.
At the same time, the decision will help ensure that the extension of credit remains viable for banks despite lingering economic volatility, according to Fitch.
In the current form of the stress test, borrowers must qualify at the greater of 5.25% or the mortgage contract rate plus 2%
“If reduced, it would lower the cost of mortgages and make housing more affordable, but would also increase credit risk, given current deteriorating economic conditions,” Fitch said. “The MQR is a safety buffer that increases the likelihood that homeowners will still be able to pay their mortgages in a rising rate environment, indicating if borrowers can absorb higher interest rates than what they initially contracted to pay.”
The Office of the Superintendent of Financial Institutions (OSFI), has decided not to tighten regulatory limits on debt-service coverage.
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 17, 2023
Read more: https://t.co/pngH6ivBl6#mortgageindustry #financialregulation #mortgage
Fitch said that the decision to maintain the MQR came at a time when the average mortgage contract rate, set in June 2021 when the stress test was last revised, stood at nearly 3%.
“The market pushback against the 2% capital buffer required under the more conservative B20 rules was that it was arbitrary, with rates not likely get that high,” Fitch outlined. “Canadian mortgages usually have a 25-year amortization period, but borrowers have to renegotiate the interest rates with the bank typically every five years. Certain mortgages originated during the pandemic, particularly in 2021, had contract rates of around 2%.”
Fitch noted that while many borrowers have yet to experience an increase in monthly payments, a significant share of mortgages is slated for reset in 2025.
“When this cohort renews their mortgages in 2025-2026, rates will be closer to 5.25%, the rate for which they were originally qualified,” Fitch said. “As such, the resulting payment shock, in and of itself, should not translate into weaker performance. Borrowers are now facing contract rates nearer 7% and need to be qualified at 9%, which largely explains the waning demand for mortgages.”
