Canada’s Real Estate Industry Just Asked OSFI To Loosen The Mortgage Stress Test

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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  • Ian Brown 3 years ago

    The only way to get political change in Canada is to become a Realtor. They give the marching orders.

    • Omar 3 years ago

      No kidding. Canada is turning into a bad joke. The real estate board dictates the federal policy. If they tell the bank regulator what to do, confidence in the whole country’s institutions will grind to zero.

      • GORDON CLAYTON 3 years ago

        Okay, I’ll bite. I’m a realtor, and I write no rules for anyone. Please try and explain how this policy is simply a punishment for those that are living frugally and on the edge and a full advantage to those wealthy enough to spend money and pass the test? And also, please explain how freezing young Canadians out of housing when it perpetually has enriched the privileged owner class is somehow fair to those same young Canadians? The stress test is illogical, callous, and discriminatory and should be nearly abolished, If you can afford what the bank is offering for the foreseeable future, who the heck knows what your life will bring in the coming 5 years!?

        • GORDON CLAYTON 3 years ago

          oops… I meant please explain how this policy isn’t…

          • RWZM 3 years ago

            Let’s do a thought experiment.

            Imagine two parties bidding on a house. One has more money, and one has less. The person with less is afraid of being “frozen out” by the stress test.

            But wait a second–shouldn’t the person with more money win the house anyway, regardless of whether there’s a stress test? Not if the person with less money is willing to take on a much larger risk to outbid the person with more money.

            The only way that the stress test “freezes” someone out, is by preventing a transaction where the person with less money accepts higher levels of risk than the person who has more. This increases prices, puts financial strain on the winner, and creates systemic risk in the entire system. If indeed it’s an objectively good price to pay–and it “builds wealth”–the person with more money should be able to see that, and still get the house. However, the person with less money is emotionally motivated by the opportunity to access something they cannot afford. Which creates a bubble.

          • K 3 years ago

            do reply RWZM logical message below 🙂

            Realtors would love to remove all tests so that they can sell a million-dollar home to a guy with a $50000 annual salaries and let him go bankrupt next year if the interest rate rises.
            I feel the government has failed in a big way by now being able to control the price rise as it’s a basic need of every person. They just becoming ostrich saying market driven but 0.05% interest is not from the market, its done by someone other than a common guy like me that triggered this disaster I feel. Just bring interest rates to 1.5% on savings account and let things settle down.

        • Smaug 3 years ago

          If you want to prevent the housing market from further enriching the privileged class, you must tame price growth. To tame price growth, you must reduce demand. To reduce demand, you must remove the riskiest buyers from the market. How else do you want to do it? By removing more qualified buyers? There, I explained it.

          However, that explanation is moot. OSFI’s mandate is not to be “fair to young Canadians”. Their mandate is to protect the financial system from ruin by preventing too many high-leverage loans from sitting on the banks’ books. Once again, the only way to prevent that is by preventing the riskiest buyers (those buyers with the worst income-to-debt ratios and highest leverage, who pose the greatest risk of default) from entering the market in the first place. How do you do that? By raising qualification standards so that many of those who currently are just barely able to qualify, no longer do.

          Finally, loaning enormous sums of money to marginal buyers is not any more “fair” than not loaning enormous sums of money to them. The US housing crash had many causes, but one of them was this pervasive idea that everyone deserved to own a house, no matter how low income they were. Both Democrats and Republicans during the 90s and early oughts tripped all over themselves to promote home ownership as a means of improving poor communities and allowing the lower class to join the middle class. The governments of Ireland and Spain had similar mindsets and policy goals. How did that work out for them?

        • Matt DP 3 years ago

          It is meant to be a cooling measure without an absolute collapse in housing (as we saw in the US in ’08). Leverage is great, when it’s managed, but if the majority of new homeowners today are stretching themselves financially to buy, you inherently risk the financial wellbeing of the entire mortgage market.

          It is a well-known fact that Canadians spend more as a % of income on housing (both in terms of rent and ownership costs). Immigration is the narrative, which makes sense to a degree, but we also have lucrative, loophole investors (overseas and domestic) who invest on the premise of housing only going up. This is where a lot of the risk comes from, and why these measures are needed.

          You may not write policy, but you definitely benefit from the brass that does — 10-15% of CDN GDP comes from housing transactions (sales, leases, etc.), the gov’t would be nuts not to protect it.

        • Sam 3 years ago

          High housing costs are freezing young Canadians out, not stress tests. Also, banks have a responsibility to mitigate risk when lending, long and short-term.

          “If you can afford what the bank is offering for the foreseeable future, who the heck knows what your life will bring in the coming 5 years!”

          Wow…..too many ways to answer that one…..

          All banks have requirements for lending…ie some sort of stress test. The question should be, to what degree should governments force banks to tighten their lending practices and what should that look like?

        • James Ling 3 years ago

          The issue is that the majority of commenters here are people that desperately want a detached house but don’t have the downpayment, and now likely couldn’t afford payments or would be strapped. You can especially tell because of their constant disdain and flaming of condos and how they’re trash and nobody wants them. So they’re likely people that were priced out waiting for a “crash” to buy a detached as they don’t like condos. They generally cycle through for a few years posting about the upcoming crash and eventually buy and disappear… even some of the most prominent posters like bluetheimpala finally threw in the towel and bought in 2017. Nothing you say will be listened to and the same comments will be parroted.

          • Trader Jim 3 years ago

            Bud. Most of the commenters are also professional forum users and are mostly homeowners already. Your assumption is jealousy, but in reality, we’re discussing the delusion people like you share.

            Or maybe you’re right, I’m looking to upgrade from my 6,000 sqft home to an 8,000 sqft home. One day. If only the OSFI stress test that doesn’t apply to us was just removed. Then I could!

          • Average Man 3 years ago

            I don’t dislike condos, I dislike the condos they’re building. If they built them like 1960s apartment buildings, but plus washer dryers and dishwashers, I’d love condos. What I don’t love is glass walls, “dens” instead of second bedrooms, glass INTERIOR walls and dumb amenities I’m never gonna use.

          • Oops 3 years ago

            The solution will come not from within but from an external shock like a war courtesy of China or the US. Absent this, I don’t see how this debt bonanza will stop. Perhaps if there is inflation and rates rise, but this seems unlikely at the moment.

            BUT, if the QE party keeps going, I’d probably stick w/ US equities. Not Canadian. Those are trash. Canada isn’t an industrious country.

            If our tiny country can keep this dumpster fire of housing roaring, you can be sure the Americans will be keeping their markets roaring too. After all, who are we in the grand scheme of things?

          • James Ling 3 years ago

            Bud… no they aren’t, have you not read all the posts and wild rants?

            I’m not the one with a delusion for 12 years running with “the crash just around the corner”.

            I personally hate the entire real estate industry and feel it should not be used as a financial asset. The only way this could ever happen is by removing bidding completely and make homes set price. Realtors would then have to price properly and you lose the bid/ask of a market investment. Problem would be solved in a week, at the cost of political suicide.

    • Paul 3 years ago

      That is hogwash. You might be able to say policy is weighted in their favour currently but real estate agents are by no means political elite. Your MP’s and MPP’s are the ones creating policies.

      • Smaug 3 years ago

        I will say that I agree with the no stress-testing on renewals bit though. The lender qualified you on the mortgage. 5 years later they deny a renewal even if you’ve got a spotless record of making your payments every month, based on some ratio? No, that’s just silly. In fact, that could precipitate a crisis. The only correct regulation is one that keeps marginal buyers out in the first place. Once the bank approves the loan, they should be stuck with is until default. And if they package and sell that loan to someone else, well then that someone else should purchase these things with open eyes.

  • Hosh 3 years ago

    It’s true that real estate manipulates the price housing. The bank allowed these loaners to have more loans so they can afford a home but the realtors discouraging buyers from not using their entire loan because they will likely lose alot of opportunity of having a home. We had great agents who have been working side by side with scotia and got us a home within our budget, they did not care about making alot of money, they wanted to help us get a home. So all of these stress test in the near future needs to keep going, realtors have this big community where they all plan everything to make more money from people.

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