Thinking of buying a house or a condo despite the real estate frenzy? The test to get your mortgage will be more difficult. But it’s for your own good, argues the Office of the Superintendent of Financial Institutions (OSFI).
Posted on April 8, 2021 at 5:44 p.m.
Updated at 11:45 p.m.
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OSFI wants to prevent buyers from being able to pay off their mortgages when interest rates – which are at a historically very low level – return to a more normal level. Financial institutions currently offer a rate between 2.44% and 2.49% for a five-year fixed rate mortgage.
“We want to avoid an increase in the number of people who are in [une] situation [où elles seraient incapables de faire face à une hausse des taux hypothécaires]. If rates return to pre-pandemic levels, it could lead to such a situation, ”said Jeremy Rudin, Superintendent of Financial Institutions, in an interview with Press.
The federal regulator proposes as early as June to force banks to use a minimum mortgage rate of 5.25% to calculate the maximum amount they can give a buyer on a mortgage. Currently, banks must use the minimum rate of 4.79% (the Bank of Canada’s five-year rate).
The goal of the credit test: to make sure the buyer doesn’t become suffocated by their mortgage payments – especially if interest rates rise. “Raising the floor rate will help us reduce that possibility,” says Jeremy Rudin.
However, do not expect this change in calculation method to have a major impact on property prices, which have risen sharply for a year. “I don’t expect these changes to have a lasting or significant effect on prices. [immobiliers]. The idea is to strengthen the security of the banks and the stability of the system, which is our mandate, ”says Jeremy Rudin.
Real estate boom since COVID-19
The real estate market has experienced a dramatic increase in the past year during the COVID-19 pandemic.
In Montreal, the price of houses and condos increased by 15% in one year, from February 2020 to February 2021, according to the Teranet-Banque Nationale index. The annual increase was 7.5% in Quebec. Nationwide, the average increase has been 9.8% over the past year.
“We don’t want the banks to become less severe”
With real estate prices rising sharply and a strong demand for houses, buyers (very) often find themselves participating in higher bids.
Against this backdrop, OSFI on Thursday warned banks that it would be keeping their eye on them to ensure they don’t offer too high mortgages to customers who can’t afford them. Especially since OSFI believes that the “household debt ratio remains high”.
“We don’t want the banks to become less stringent,” says Jeremy Rudin.
The current situation can lead to complacency. [Il faut que] banks pay attention to income checks and the ability to repay debt.
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Jeremy Rudin, Superintendent of Financial Institutions
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Banks will, however, continue to have a great deal of latitude in how to apply the credit test for buyer borrowers.
For example, OSFI does not require all banks to have a maximum ratio of borrower’s income spent on their mortgage. Each bank has its own policies, and OSFI ensures that they are followed. “Our main concern now is to make sure that the banks and the system are prepared for a return to pre-pandemic economic and financial conditions,” says Jeremy Rudin. Translation: the banks must also be prepared for a hike in mortgage rates.
OSFI’s proposal (announced Thursday) to raise the credit test interest rate targets about two-thirds of mortgages in the country. It applies to mortgages where the borrower buyer has a down payment of at least 20% of the value of the property (mortgages not insured by the Canada Mortgage and Housing Corporation). OSFI’s exact proposal is to use the higher of the following two mortgage rates: either 5.25% or the contractual rate + 2 percentage points (e.g. 2.49% + 2 points = 4.49%) . In practice, due to the very low interest rates currently, banks would almost always use the minimum rate of 5.25%.
For mortgages with a down payment of less than 20% (mortgages insured by CMHC), the Department of Finance determines the mortgage rate to be used in the solvency test. Usually, Ottawa uses the same rate as OSFI’s test.
OSFI will consult with financial institutions in the coming months, but the federal regulator is expected to adopt its proposal in June. The Canadian Bankers Association, National Bank and Desjardins did not comment.
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