The banking regulator says it will continue to assess lenders' capacity to manage borrower challenges
The Office of the Superintendent of Financial Institutions said that it is keeping a keen eye on mortgage lenders as market risks continue to make themselves apparent amid rate hikes and cooling home prices.
A particular area of concern is household debt, which the OSFI said registered at 182% of household disposable income during Q2. Elevated inflation, which stood at 6.9% in September, is another weak point.
Federally regulated financial institutions “need to ensure that they are prepared to handle the potential implications of lower housing prices and higher interest rates,” OSFI said in its report.
“In particular, the level of loss experienced by lenders not only depends on the likelihood of a default, but also how much of the loan the banks would lose in case of a default,” it added. “OSFI will take action to continue to assess FRFIs’ readiness to manage borrower challenges in their mortgage portfolios and higher potential losses in light of their existing provisioning levels and capital positions.”
Read more: Canada inflation sets stage for rate increase
OSFI underscored the crucial role that the stress test plays in moderating these risks, and maintained that it remains a necessary component of the Canadian financial system.
“The (minimum qualifying rate) has provided a margin of safety that improves borrowers’ ability to absorb unexpected changes in interest rates or income,” OSFI said. “The MQR prevented borrowers from stretching their borrowing capacity to its maximum, thus ensuring that a larger number of borrowers could keep making payments even as interest rates rise.”
