OSFI Stress Test Changes For Uninsured Mortgages 2021

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OSFI Stress Test Changes For Uninsured Mortgages 2021

Written by Lisa Rennie
Fact-checked by Caitlin Wood

OSFI Stress Test Changes For Uninsured Mortgages 2021

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Mortgage Mortgage Stress Test

Right now, we’re seeing an incredibly hot housing market across Canada. Home prices have skyrocketed and the number of home sales has exploded. According to Canadian Real Estate Association (CREA), home sales soared over 39% in February 2021 compared to the same month last year. And the average home price in Canada is up 25% from the same time in 2020. 

These figures have many speculating that the housing market is currently overheated, and there is a lot of concern that many homebuyers could be biting off more than they can chew. 

With interest rates so low right now, more and more buyers are flocking to the market. But given the high prices of homes, they may be over-leveraging themselves.

In an effort to prevent an onslaught of foreclosures, the mortgage industry has implemented a “mortgage stress test”, which is the process of approving uninsured mortgages against a specific interest rate to ensure that buyers will still be able to afford their mortgage even if interest rates increase. 

Opponents to this stress test believe that it is too restrictive. Those who agree with the test argue that it will help maintain mortgage underwriting standards in Canada, considering the real estate boom going on right now.

And things are about to get tighter. 

OSFI New Minimum Qualifying Rate For Uninsured Mortgages

Early in 2020, OSFI began a consultation process on the qualifying rate for uninsured mortgages, but these consultations were suspended in March 2020 after the COVID-19 pandemic struck. It restarted its consultation on April 8, 2021, and placed particular focus on the importance of sound mortgage underwriting.

Right now, the current qualifying rate is the mortgage contract rate plus 2%, or the benchmark rate, whichever of the two is higher. Currently, the benchmark rate is 4.79%, which means borrowers would have to qualify for a home loan at a qualifying rate of 4.79%. 

Recently, the Office of the Superintendent of Financial Institutions (OSFI) announced that it will be making some changes to the mortgage stress test for uninsured mortgages. The entity is proposing that uninsured mortgages will have to be subject to a qualifying interest rate equal to the mortgage contract rate plus 2%, or a 5.25% minimum. OSFI is also suggesting that rate recalibrations take place at least once per year.

The new changes took effect June 1st, 2021.

What Are Uninsured Mortgages?

Uninsured mortgages are those with at least a 20% down payment and do not require mortgage default insurance. Any mortgage with a down payment less than 20% of the purchase price of a home would require mortgage insurance on top of the principal and interest. This insurance is paid by the borrower and protects the lender in the event of mortgage default. 

Since mortgages that come with at least 20% down reduces the overall loan amount and the loan-to-value ratio, lenders are not as vulnerable. Therefore, mortgage default insurance is not required for these home loans, which means they are “uninsured.”

Reasons For The New Minimum Qualifying Rate For Uninsured Mortgages

The OSFI’s recent decision to make changes to the mortgage stress test comes as the COVID-19 pandemic continues to negatively impact national and local economies. Unemployment rates continue to remain relatively high while hundreds of thousands of businesses have shuttered. 

But while millions of Canadians find themselves on CERB, others are still managing to muster up enough money to participate in the housing market. 

Certain major housing markets across the country have historically been on a steady increase. But over the past year, just about every market in Canada is seeing sizzling real estate markets, leading many to wonder whether or not the market is overheated. 

The rapid increase in home prices since the beginning of the pandemic is being driven by a number of factors. Ultra-low interest rates are one major driving factor fuelling homebuyers to get into the market, as they make home buying much more affordable. 

Travel restrictions have also allowed many Canadians to put money aside that otherwise would have been spent on vacations. Further, the rise in remote work has promoted many city dwellers to seek more space outside of urban centres. 

The influx of buyers has prompted policymakers to make sure borrowers don’t get in over their heads. As things in the market stand right now, lenders and borrowers alike could be placed at heightened risk. By tweaking the mortgage stress test qualifications, the OSFI is ensuring that a slew of foreclosures don’t occur. 

Effect Of The OSFI New Minimum Qualifying Rate For Uninsured Mortgages

The new minimum qualification rate for mortgage stress tests for uninsured mortgages will likely have the following effects:

Less Risk For Lenders

The minimum qualifying interest rate means that borrowers will have to pass more stringent eligibility criteria to secure a mortgage. This will ensure that borrowers will be able to continue to make mortgage payments if rates increase, which will reduce the risk level for their lenders.

Decreased Affordability

The OSFI’s changes to the mortgage stress test will reduce the maximum mortgage affordability of the average borrower by requiring proof that they’ll be able to afford their home loan at higher interest rates. Fewer borrowers will be able to secure a mortgage, which means fewer buyers. In turn, the housing market will likely cool off to some degree. 

Disparity Between Economic Classes

By increasing the qualifying interest rate, more middle-class Canadians and first-time buyers will be pushed out of the market. That means the wealth gap could widen and make it more challenging for Canadians without help from family to buy a home.

OSFI Stress Test Changes FAQs

Who is the OSFI?

The Office of the Superintendent of Financial Institutions (OSFI) is a federal government agency that was established in 1987 to allow for healthy competition among financial institutions and protect policyholders, depositors, creditors, and pension plan members.

Who does the OSFI proposed rate affect? 

Starting June 01, 2021, the new qualifying rate proposed by the OSFI will apply to both insured and uninsured mortgages. This means, whether you put a 20% down payment or a 5% down payment, you’ll need to pass the mortgage stress by showing you can afford your mortgage with a rate of 5.25% or the mortgage contract rate plus 2%, whichever is higher.

Can I avoid the mortgage stress test?

The only way you can avoid the mortgage stress test is by getting a mortgage with an alternative lender or credit union. The reason being, provincially regulated credit unions and alternative lenders are not regulated by the OFSI, and are thus not required to enforce the mortgage stress test.

What is the new qualifying rate for uninsured mortgages?

The previous qualifying rate of 4.79% for uninsured mortgages is being replaced with 5.25% or the mortgage contract rate plus 2%, whichever is higher. As of June 01, 2021, all borrowers who apply for a mortgage (insured and uninsured), will have to qualify under this new rate.

How do I pass the new mortgage stress test?

In order to pass the new mortgage stress test, you need to demonstrate that you are still able to afford your mortgage payments under the new qualifying rate of 5.25% or the mortgage contract rate plus 2%, whichever is higher. The best way to improve your chances of this is by reducing your level of debt and increasing your income, even if just temporarily.

Final Thoughts

The new changes to the mortgage stress test‘s qualifying rate will make home buying less affordable, which means fewer buyers entering the market. We could potentially see the housing market and home prices start to level off as a result. While some may argue that these requirements are too stringent, others may stress the importance of not over-leveraging in the name of buying a home. 

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