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(April 10, 2021)

Intro (pre-amble): up to 7:15 mark of podcast

On Thursday April 8 (yesterday), The Office of the Superintendent of Financial Institutions, OSFI (the Canadian Bank watchdog) announced that they are proposing changes to the current stress test rule. So basically, consider this the last-call bell to qualify under the current stress test until June 1, 2021. It’s not 100% official as of yet, but the chances of OSFI not proceeding with their new recommendation is slim to none.

Before I get into the proposed recommendation, here’s a quick recap on the current stress test:

Rather than qualifying based upon the actual mortgage contract rate, all mortgage applicants are required to qualify at a rate that is 2% higher, or 4.79% – whichever is higher (4.79% is the predetermined 5 year benchmark as imposed by the Bank of Canada…since 2018, this benchmark rate has varied between what it is today, 4.79%, to as high as 5.44%). So throughout COVID (essentially all of 2020), applicants have been qualifying at 4.79% which has at some times been 3% higher than the actual contract rate. But lately, it’s equating to less than 3%, but still higher than 2%. So really, if anything, it should be known as the 3% stress test rather than 2%…I digress.

So right off the bat this should extinguish some of the theories that this market was set ablaze by low interest rates. YES, interest rates are at historical lows, but to get approved for these amazing rates mortgage holders have been qualifying for them at a rate that is similar to where rates were at back in 2008/09 (4-6%). Since 2018, Canadians have only been awarded these historical low rates (1.39% to 2.59%) only after they’ve proven that they can qualify for them at much higher rates (4.79% to 5.44%).

Ok so now let’s move on to the proposed change that OSFI will very likely implement this June:

As I mentioned earlier, this is not 100% official, but will very likely become official sometime in May, then the mad-rush countdown will begin all the way until the actual implementation date of June 1.

And here it is, the big news…the minimum qualifying rate will increase from 4.79% to 5.25%.

How will this impact someone qualifying for a mortgage?

Consider a qualifying income of $100,000 (individual or combined):

At the current stress test qualifying rate of 4.79%, the maximum mortgage qualification would equate to $500,000 for an insured mortgage and $630,000 for a conventional mortgage
At the proposed stress test (likely effective June 1) qualifying rate of 5.25%, the maximum mortgage qualification would equate to $470,000 for an insured mortgage and $605,000 for a conventional mortgage

Other interesting points:

This will diminish the purchasing power of home buyers (who require mortgages) by 4-6%
OSFI policy is not intended to influence the housing market, but rather to maintain and secure the overall integrity of Canada’s financial system. Even though its policies (obviously) impact the housing market to varying degrees, its intent and focus is on preserving the overall integrity of the financial system
If you read between the lines, this could also be viewed as a forecast of where OSFI thinks the 5 year rate will be…in this case, they are indirectly pricing in a rate hike of about 50 bps (0.50%)…we’ll see how this plays out
So far, this increased qualifying benchmark is only marked for uninsured mortgages. But, it is likely to blanket over to insured mortgages as well. The reason why insured mortgages aren’t in the conversation at this point is simply because insured mortgages (via CMHC) are not under OSFIs regulating umbrella. If/when this increased qualifying rate becomes applicable to insured mortgages, you could then expect a formal announcement by the Minister of Finance declaring so.

Here are my thoughts..

Don’t misinterpret this announcement as a housing market influencer (even though it will have an impact on the housing market, but to what degree remains to be seen). I believe that OSFI is genuine in its mandate of being the overseer of Canada’s overall financial system…take this policy like all other previously implemented OSFI policies. Regardless of which group will be most negatively impacted from this (first timers, middle income earners, etc), the outcome is simply to give assurance to our financial system that all the mortgage holders today will be able to make their payments 5 years from now when interest rates are higher. That’s it. This is OSFIs number one priority. If anything, the most negative thing about this announcement and eventual implementation is that it might give the real policy makers (municipal, provincial and federal governments) an out, allowing them to remain idle on the sidelines and continue to do nothing meaningful when it comes to addressing the supply side of the real estate crisis. I’ve said it before, the differentiator is at the municipal government level. Frustrated home shoppers/buyers should be directing their lobbying efforts towards City Halls rather than Parliament. The more people lobby the federal government to step in, the higher taxes go (this seems to be all that they answer with). It’s time to demand more from our local politicians and municipalities as this is where policy can have a direct and meaningful impact on real estate in your own backyard. Asking Ottawa for advice on how to balance Vancouver’s real estate crisis is simply insane, yet we continue to call on them to do so.