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Mortgage stress tests unchanged despite housing market slowdown

Mortgage stress test levels were left unchanged Thursday as the federal banking regulator and Department of Finance favoured a cautious approach over calls to relax tests to help a slowing housing market.
Canada's banking regulator is expected to make an announcement regarding the interest rate used in a key stress test for uninsured mortgages this morning. New homes are built in a housing construction development in the west-end of Ottawa on May 6, 2021. THE CANADIAN PRESS/Sean Kilpatrick

Mortgage stress test levels were left unchanged Thursday as the federal banking regulator and Department of Finance favoured a cautious approach over calls to relax tests to help a slowing housing market.

The Office of the Superintendent of Financial Institutions (OSFI) kept the minimum qualifying rate for uninsured mortgages at the greater of the mortgage contract rate plus two percentage points, or 5.25 per cent, while the finance department followed suit with the same rate on insured mortgages.

The maintenance of the stress test levels, which at current interest rates force some borrowers to qualify for rates above eight per cent, comes as the Bank of Canada is widely expected to be at or near the end of its aggressive rate hike cycle.

But while the levels borrowers are being forced to qualify at are higher than analysts expect interests rates will actually go, OFSI maintains that the stress test is meant to protect against economic stresses generally, not just interest rates.

"In an environment characterized by sustained high inflation, rising mortgage interest rates, and potential risks to borrower income, it's prudent that lenders continue to test borrowers for adverse conditions," said Tolga Yalkin, OFSI's Assistant Superintendent of Policy, Innovation and Stakeholder Affairs, during a media briefing.

When setting rates, the regulator looks at the financial stability of banks, said Yalkin, more than any direct assessment of how the rates are affecting the ability of people to buy homes. 

“The perspective that we take, and the risks that we're trying to help support the management of, is a risk to the financial institutions that we regulate, ultimately with the aim of protecting borrowers and creditors and their interests and rights.”

He said OFSI would be looking at a wide range of perspectives on ways to update the stress test as it launches a likely months-long review of the regulations in January.  

Federal Finance Minister Chrystia Freeland said in a statement that maintaining the minimum rate supports prudent underwriting standards, and "builds in a buffer for homebuyers in case of changing economic or personal circumstances."

The emphasis on prudence comes as many economists expect some level of recession next year after the Bank of Canada made seven consecutive rate increases this year, bringing its key interest rate to 4.25 per cent in an effort to cool inflation by slowing the economy. 

Those rate increases, up from 0.25 per cent at the beginning of March, have bumped mortgage rates up to a little under five per cent for the most competitive offers while some bank mortgage rates stand at around 6.5 per cent, meaning a borrower would have to qualify for an 8.5 per cent mortgage to secure the financing. 

Each 0.25 per cent increase in the stress test rate is about a $10,000 difference in the mortgage amount, said Victor Tran, a mortgage specialist at, noting that it's likely not a huge impact for some but could be significant for many. 

The reduced buyer power, on top of the steep rate increases, has helped put pressure on the housing market.

The Canadian Real Estate Association said Thursday that November home sales were down 39 per cent from a year ago and the average home price was down 12 per cent, while seasonally adjusted home sales were down 3.3 per cent on a month-over-month basis.

The stress test is certainly one factor in that slowdown, said BMO senior economist Robert Kavcic.

"It's the actual contract mortgage rate that matters most, but certainly when you have stress test rates this high it's just crimping the amount of available lending that's out there for homebuyers."

The stress test has however proved its worth, after many were calling it excessive last year, given how quickly rates have risen, said Kavcic.

"It turns out that in hindsight, the stress test was actually very useful from a financial stability perspective."

He said that there may not be a need for the full two percentage point buffer now given rates have largely topped out, but that it could also help insulate on wider economic stresses.

"If we do go into a period of economic weakness, especially in the labour market, maybe it still pays to have that stress test in place."

Cameron Levitt, a sales representative at the Richards Group at REMAX Hallmark, said he's glad the stress tests were left unchanged as it's helping protect against buyers rushing into the market as they did last year. 

“Homeowners and homebuyers forgot that risk exists, and this last year has been a big wake-up call.”

This report by The Canadian Press was first published Dec. 15, 2022.

Ian Bickis, The Canadian Press