Bank regulator proposes tougher mortgage rules as ultralow rates fuel overheated housing market

[Globe and Mail – April 8, 2021]

Canada’s bank regulator is proposing to make it harder for borrowers to qualify for a home loan, as ultralow mortgage rates fuel the country’s overheated real estate market.

The proposed changes to the mortgage stress test for uninsured mortgages would effectively raise the minimum qualifying rate to 5.25 per cent.

Current rules require banks to qualify borrowers at a rate two percentage points higher than the market rate or the Bank of Canada’s conventional five-year rate of 4.79 per cent, whichever is higher.

But under the Office of the Superintendent of Financial Institutions (OSFI) proposal, the mortgage stress test will not rely on the central bank’s five-year rate. Instead, the regulator proposed to set the minimum qualifying rate at 5.25 per cent or two percentage points higher than the market rate, whichever is higher.

Policymakers have been under pressure from bank economists to slow the real estate market. Many parts of Ontario, the Maritimes, British Columbia and Quebec have seen price increases between 20 per cent to 35 per cent during the pandemic. Prices for a typical detached house in some Ontario suburbs have gone up by at least $100,000 in three months

“The current Canadian housing market conditions have the potential to put lenders at increased financial risk. OSFI is taking proactive action at this time so that banks will continue to be resilient,” the regulator said in a statement.

Under the proposal, the regulator said it would revisit the qualifying rate at least once a year to “ensure it remains appropriate for the risks in the environment.”

The regulator said the proposal is open for comment up to May 7 and would disclose final changes May 24. It expects the new proposal to come into effect June 1, 2021.

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