Regulation continues to serve important purpose despite calls for reform, says CEO
Interest rates have continued to tick resolutely upwards in 2022, a trend that’s seen the re-emergence of a debate in the mortgage space on whether changes to the stress test rate are required.
Last week saw the Bank of Canada announce its latest rate increase of the year, hiking its overnight rate to 3.25% in a development that means the qualifying rate for variable mortgages is now even higher.
Homebuyers borrowing from a federally regulated lender are required to prove they can meet the higher of 5.25%, or the qualifying rate plus 2%, with the prime rate now matching the former and five-year fixed mortgage rates hovering slightly higher.
That means most new buyers are now having to qualify at much higher interest rates than earlier in the year, sparking some calls for regulators to revisit their criteria for testing borrowers in a much-changed 2022 market.
Toronto Regional Real Estate Board (TRREB) president Kevin Crigger said the federal government could remove the stress test for switching existing mortgages to a new lender and allow for longer amortization periods on mortgage renewals as home sales continued to dip through August.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) has poured cold water on speculation that it could loosen mortgage qualifying rules, with its head Peter Routledge acknowledging that clamour while also confirming that no change to its underwriting standards was imminent.
“The uncertainty and anxiety caused by a rising interest rate environment have, understandably, caused some Canadians to advocate for a loosening of the underwriting standards in Guideline B-20,” he told a Toronto audience. “Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”
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That’s the right approach, according to a prominent Toronto-based mortgage broker who said the stress test had proven “very beneficial” to the mortgage and housing markets as a whole since its introduction.
Drew Donaldson (pictured top), founder and CEO of Donaldson Capital, told Canadian Mortgage Professional that the measure had helped the market, and homeowners, cope with rapid rises to interest rates this year – and that it remained a necessary measure for the future.
“Going forward, some would say that it’s not needed. I still think it’s fine – keep it in place for now,” he said. “We’ve seen how fast rates have moved in the last six months. Could rates go from 5% to 7%? They could, so why not keep the stress test in place, and just make sure that borrowers can withstand that?”
The only area where an adjustment might be merited, Donaldson said, is in nonconforming loans, which usually feature significantly higher rates than standard or conventional arrangements.
The current stress test rate came into effect last year after OSFI and the federal finance ministry announced that qualifying criteria would be raised in response to a red-hot housing market and rock-bottom borrowing rates.
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While many of Donaldson Capital’s clients are high-net-worth individuals who typically aren’t impacted by changes to the stress test, Donaldson noted the importance of explaining the reasons for the maximum pre-approved amount to new buyers, even if a detailed rundown of the stress test wasn’t always required.
As for the prospect of reform to the stress test in the coming months, OSFI’s steadfastness on the matter appears to have firmly shut the door on that possibility for the foreseeable future.
Routledge indicated in his speech that the regulator is “constantly evaluating” the stress test, but added that it “must accept the risks of acting early to minimize the costs of acting too late.”
Donaldson said a one- to two-year lull in the real estate market was required to get things back to more normal levels. “This whole 10%, 20%, 30% growth year over year was just unprecedented, and it wasn’t healthy for the market,” he said. “So I would say leave [the stress test] in place.
“The Bank of Canada is deliberately trying to cool demand on real estate [and] a lot of other areas of the GDP market. So why would the regulator then try to spur and get growth back going again? Let’s just let things sit for a year or a year and a half, and then at that point in time, maybe revisit the stress test.”
