Bank regulator proposes tougher mortgage rules - The Globe and Mail

Canada’s bank regulator is proposing to make it harder for borrowers to qualify for a home loan, as ultralow mortgage rates fuel the country’s overheated real estate market.

The potential changes to the mortgage stress test for uninsured mortgages would effectively raise the minimum qualifying rate to 5.25 per cent from the current 4.79 per cent. The change is scheduled to occur in June, which would likely exacerbate the market run up over the next few months as borrowers race to qualify at the lower rate.

“It will make the situation worse since demand will rise as buyers will try the move ahead of the change and accelerate purchasing activity,” said Benjamin Tal, deputy chief economist with CIBC.

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Today, rules require banks to qualify borrowers at two percentage points above the market rate or the Bank of Canada’s conventional five-year rate of 4.79 per cent, whichever is higher. But since the interest rate on a five-year fixed loan is below 2 per cent, the central bank rate is the minimum threshold.

Under the Office of the Superintendent of Financial Institutions (OSFI) proposal or “new consultation,” the mortgage stress test will not rely on the Bank of Canada rate. Instead, the regulator proposed to set the minimum qualifying rate at 5.25 per cent or two percentage points higher than the market rate, whichever is higher.

Policymakers have been under pressure from bank economists to slow the real estate market. Many parts of Ontario, the Maritimes, British Columbia and Quebec have seen price increases between 20 per cent to 35 per cent during the pandemic. Prices for a typical detached house in some Ontario suburbs have gone up by at least $100,000 in three months

“The current Canadian housing market conditions have the potential to put lenders at increased financial risk. OSFI is taking proactive action at this time so that banks will continue to be resilient,” the regulator said in a statement.

Royal Bank of Canada, the country’s largest mortgage lender, voiced support for tighter underwriting standards. “That would put pressure on people who are overstretching to service a larger home with a low interest rate,” RBC chief executive Dave McKay said on a conference call with reporters on Thursday, when he had not yet seen details of OSFI’s proposal.

However, prominent economists said stricter rules would not do much to slow the market. “This move will have a very modest impact at the margin, but not change the tone of the market,” said BMO senior economist Robert Kavcic, who has been urging policymakers to act quickly to break the heat.

BMO chief economist Douglas Porter said it could have a “mild dampening effect on the market,” when it takes effect, but said “it’s unlikely to single-handedly turn this freight train around.”

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Under the proposal, the regulator would revisit the qualifying rate at least once a year to “ensure it remains appropriate for the risks in the environment.”

The proposal is open for comment up to May 7 and any final changes will be disclosed May 24. OFSI expects the new proposal to come into effect June 1.

The mortgage industry group, which has been pushing an easier stress test, said it would hurt first time home buyers. Mortgage Professionals Canada president, Paul Taylor, said this would make it harder for buyers at the bottom end of the purchasing spectrum.

It is unknown whether the federal finance department will also raise its minimum qualifying rate for insured mortgages, which have a down payment of less than 20 per cent of the purchase price. The department did not immediately respond to a request for comment.

With a file from James Bradshaw

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https://news.google.com/__i/rss/rd/articles/CBMid2h0dHBzOi8vd3d3LnRoZWdsb2JlYW5kbWFpbC5jb20vYnVzaW5lc3MvYXJ0aWNsZS1iYW5rLXJlZ3VsYXRvci1wcm9wb3Nlcy10b3VnaGVyLW1vcnRnYWdlLXJ1bGVzLWFzLXVsdHJhbG93LXJhdGVzLWZ1ZWwv0gEA?oc=5

2021-04-08 17:03:10Z
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