Canada Keeps Mortgage Stress Tests Amid Housing Headwinds

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(Bloomberg) — Canada’s banking regulator and the federal government maintained requirements that homebuyers are able to qualify for their mortgages at rates higher than what banks are offering them, prioritizing financial stability over helping the country’s declining housing market. 

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Borrowers seeking uninsured mortgages will still have to qualify for their loans at a rate two percentage points higher than the bank’s offered rate or 5.25%, whichever rate is higher at the time, the Office of the Superintendent of Financial Institutions said Thursday. That means homebuyers today will have to show they can afford loans at interest rates of more than 7%, with mortgage rates at major commercial banks exceeding 5%.

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The federal government maintained an identical requirement for insured mortgages, or those where the down payment is less than 20% of the purchase price. With uninsured mortgages, down payments have to be at least 20%.

Pressure to weaken the so-called “stress test” for homebuyers has grown recently as the Bank of Canada’s interest-rate increases ratchet mortgage costs higher. OSFI Superintendent Peter Routledge has pushed back on those calls, saying that there’s “great risk” in speculating on the direction of mortgage rates and that the minimum qualifying rate is an important safety buffer.

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“Ensuring the stability of Canada’s housing market is essential to protecting Canadians and to upholding Canada’s financial and economic resilience,” Chrystia Freeland, deputy prime minister and minister of finance, said in a statement. “We will continue to monitor the housing market and review the insured minimum qualifying rate as warranted.”

The minimum qualifying rate is meant to ensure homeowners can continue paying their mortgages despite financial shocks and that banks are maintaining high lending standards. Both objectives contribute to the overall stability of Canada’s financial system, according to OSFI.

Canadian home prices fell for a ninth straight month in November, the Canadian Real Estate Association said Thursday. That brought the cumulative price drop from February’s peak to 11.5%. The number of transactions nationwide fell 3.3%, outpacing the decline in new listings, which were down 1.3% from the month before.

(Updates with government move in third paragraph, prices in last.)