Measures helped increase financial stability, according to central bank research
New research from the Bank of Canada has examined how mortgage stress tests implemented in 2016 and 2018 impacted financial stability, influencing credit growth, housing prices, and borrower resilience during economic pressures.
The 2016 policy introduced stress tests for high-ratio mortgages, requiring borrowers with smaller down payments to demonstrate their ability to manage higher interest rates.
While this measure improved the credit quality of new borrowers—reflected in higher credit scores and lower debt service ratios—it did not slow the overall growth of credit or housing prices. Instead, it prompted a shift in borrowing toward low-ratio mortgages, which were not covered by the policy at the time.
The 2018 policy expanded stress tests to include low-ratio mortgages, effectively addressing the gaps left by the earlier regulation. This broader approach curbed credit growth and slowed the rise in house prices. It also improved the overall quality of borrowers within the regulated market by ensuring they met stricter qualification criteria.
The study also explored the resilience of borrowers during the recent monetary policy tightening, which saw interest rates rise sharply from 0.25% to 5.0% between March 2022 and July 2023.
Findings revealed that regions more exposed to the 2016 stress tests experienced smaller increases in credit delinquencies compared to less exposed areas. This mitigating effect was particularly evident in non-mortgage credit products, such as auto loans and credit cards, suggesting the stress tests enhanced borrowers’ financial capacity to withstand rising costs.
The research underscores the critical role of mortgage stress tests in fostering financial stability. By improving borrower quality and moderating credit and housing market dynamics, these measures help ensure households can manage their financial obligations even in challenging economic environments.
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