OSFI sees mortgage stress test ‘imbalance’ at renewal but rules not changing yet

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Canada’s banking regulator conceded to members of Parliament that there’s an “imbalance” successful really nan mortgage accent test is applied for immoderate homeowners renewing their terms, but stood by nan practice.

Peter Routledge, nan Superintendent of Financial Institutions, said to nan opinionated committee connected finance Tuesday. His office, OSFI, is successful complaint of applying nan minimum qualifying complaint for uninsured mortgages, colloquially called nan owe accent test, while nan finance curate oversees insured mortgages.

The accent trial presently requires borrowers to suffice for a owe astatine a complaint of 5.25 per cent aliases 2 per cent supra nan statement rate, whichever is higher, successful bid to beryllium they could grip higher monthly payments if nan Bank of Canada’s argumentation complaint roseate rapidly. Passing nan accent trial is viewed arsenic a prudent measurement to safeguard lenders offering owe loans, but limits nan size of owe and wide location worth an individual tin afford.

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Routledge was asked for his consequence to a report from nan Competition Bureau successful March, which called connected OSFI to driblet nan accent trial for Canadians renewing their mortgages. Doing truthful would make it easier for homeowners to shop astir for cheaper rates, forcing lenders to compete much sharply pinch 1 different to triumph business, nan title watchdog argued.

Canadians do not person to re-pass nan accent trial if they’re re-upping pinch their existing lender astatine renewal, sloppy of whether they person an insured aliases uninsured mortgage.

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If switching lenders astatine renewal time, however, nan minimum qualifying complaint only applies connected uninsured mortgages. Insured mortgages are not taxable to nan accent trial erstwhile it comes clip to renew, thing nan national authorities affirmed successful its Canadian Mortgage Charter unveiled past fall.

High loan-to-value mortgages spot homeowners put down little than 20 per cent of nan acquisition value upfront and truthful require owe security to screen nan higher risk. Uninsured mortgages are disposable to homebuyers who put much than that magnitude down.

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Routledge acknowledged that it mightiness not look adjacent for a homeowner pinch an uninsured mortgage, who typically has a lower-risk floor plan than an proprietor pinch an insured mortgage, to person to look a higher barroom to suffice astatine renewal.

“If I were a homebuyer facing that, I would consciousness for illustration it was an imbalance,” he told MPs.

From OSFI’s perspective, Routledge said it is due to spell done nan afloat underwriting process anytime there’s “new credit” being issued. This intends it’s due to taxable homeowners to a caller accent trial erstwhile they’re perchance changing who holds nan equilibrium of their loan, conscionable to guarantee nan applicant is still credit-worthy for a caller lender.

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But successful nan lawsuit of insured mortgages, nan equilibrium of consequence is still held by nan insurer, Routledge said, meaning there’s nary request to re-underwrite nan loan.

For that reason, he said OSFI is not presently considering nan Competition Bureau’s petition to waive nan accent trial astatine renewal for uninsured mortgages.

“I admit that location is an imbalance from nan acquisition of a borrower that doesn’t person owe security arsenic opposed to 1 that does. It’s an imbalance that we judge because of nan sound underwriting principles down it,” he said.

Routledge went connected to opportunity that easing nan accent trial successful immoderate cases could person a cascade of consequences for different lending regulations nether nan watchdog’s purview.

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“If you loosen 1 underwriting standard, you’d astir apt person to loosen more, and our instruction calls for america to beryllium reasonably vigilant connected this,” he said.

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Despite saying that OSFI would not waive nan accent trial astatine renewal, nan superintendent suggested that his agency was looking astatine different ways to rectify nan consciousness of unfairness betwixt owe holders.

“I deliberation it is simply a morganatic situation to opportunity to OSFI, ‘Can you do thing different truthful that imbalance goes away?’ We are reasoning astir it, and I do deliberation it’s a adjacent critique.”

OSFI maintained nan owe accent test, introduced successful 2018, astatine nan existent levels astatine the watchdog’s latest yearly determination past December.

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