Canada’s real estate industry is asking bank regulators to loosen lending standards. OSFI, the bank regulator, is currently holding feedback on B-20 Guideline revisions. The Guideline, better known as the “stress test,” ensures borrowers can pay their mortgage after a modest rate hike. The Toronto Regional Real Estate Board (TRREB) wants some tweaks, arguing it’s too tight. Here’s what they’re asking the regulator to consider.
About The Stress Test
Quick refresher, or intro, for those that don’t know what the B-20 Guidelines are, aka the OSFI stress test. OSFI-regulated banks now have to test uninsured borrowers for the ability to pay higher mortgage rates. This lowers the risk of borrowers unable to pay a higher rate upon renewal. Regulators are trying to lower leverage risk for both the bank and the household. It’s particularly important when interest rates are at record lows, like now.
The rate used for the minimum calculations will climb by next month. Borrowers need to have sufficient income to pay the benchmark mortgage rate, or their contract rate plus 2 points — whatever is higher. Currently, the BoC benchmark rate is 4.79%, but on June 1 OSFI plans to use a 5.25% rate. The increase will lower the maximum amount of leverage a borrower could receive by about 4.5%. Sounds like a sharp increase, but it’s only 20 bps higher than the pre-pandemic level. Along with this — they are taking feedback on whether the program needs changes.
The Real Estate Industry Wants Regional Stress Tests, and No Testing On Renewals
OFSI is currently holding stakeholder feedback, and TRREB had a few suggestions. Actually, they said CREA agrees, so it’s technically organized real estate’s suggestion. Regional stress testing, and removing the test from renewals were the primary concerns.
For regionalization, they would like to see different areas have different rules. They suggest factoring in mortgage activity, employment, incomes, and the cost of living. They cite “precedent” in such programs as the First-Time Home Buyer Incentive.
For mortgage renewals, they would like to see the stress test totally disappear. If a borrower switches lenders at renewal, the next lender needs to test their income. However, if you don’t switch lenders — you don’t need to be tested. The reason being they want every bank to ensure the borrower meets their own risk profile. Some argue the process prevents people from shopping around. This can lead to them paying higher mortgage rates.
The Requested Changes Would Make The Stress Test Useless
Stress test regionalization sounds logical until you realize it’s already built-in. Part of the reason the test was implemented, is to prevent regional overleveraging. Toronto, Vancouver, and Victoria had seen budgets pushed to the limits. The test was designed to give a cushion, so buyers didn’t get carried away with maxing out their budgets. It also helped to slow price growth. Since budgets aren’t pushed to the max in most other places, they aren’t really impacted.
As for incomes, they’re already factored. The stress test is testing a household’s ability to pay for a mortgage. Not whether the whole town can afford to pay it for them. There is little evidence families in affordable markets with stable growth are unable to buy solely based on the stress test.
Few Would Not Pass A Stress Test On Mortgage Renewals
Stress testing mortgage renewals are also somewhat controversial, but there’s no evidence of its impact. Mortgage experts say there are few cases where a renewal would not qualify 5 years after their last test. Most people just don’t want to shop around. The industry estimates 85% to 95% of borrowers renew with their current lender, out of ease. It has little to do with the stress test rejecting a renewal at a new lender.
That said, does a stress test protect lenders and borrowers more than usual? Banks have begun pilot programs that offset the leverage ratio for wealthy clients with good credit. The move effectively eliminates the leverage reduction from the OSFI stress test. The only people impacted by the test are those with modest incomes and okay credit. That’s the demographic most likely to be protected by a strict stress test.
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