The regulator is consulting with stakeholders on proposals to ensure sound mortgage underwriting
Canada’s regulator of financial institutions is considering a new minimum qualifying rate for uninsured mortgages.
OSFI says that it is re-emphasizing the importance of sound mortgage underwriting at a time when the housing market is booming, raising concerns of a bubble.
The proposed minimum rate would be the higher of the mortgage contract rate plus 2% or 5.25% and aims to ensure that borrowers would be able to afford their monthly payments in the event of changed circumstances.
In a statement OSFI said that a strong financial system is critical in Canada’s post-pandemic recovery. The minimum rate offers banks protection from one of the largest exposures that most lenders carry.
“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 statement said.
The regulator says it plans to revisit the minimum rate at least once per year to make sure it still meets appropriate conditions for the market.
The consultation on the proposals runs through May 7, 2021 and could be implemented in June.
RBC chief welcomes policy
The CEO of Canada’s largest lender has given the OSFI proposals his backing.
“I’m encouraged that that is an implementable, short-term policy that does withdraw some borrowers who are stretching themselves too much with low rates into too large of a house,” RBC’s Dave McKay said on BNN Bloomberg TV.
However, Scotiabank economist Derek Holt warns that the policy could add fuel to the red hot spring housing market.
Holt calculates that a minimum rate would reduce the homebuying power of households by 4.5% and many will be keen to buy before it was introduced.
“We may well see an even hotter spring housing market as a consequence to OSFI’s move,” Holt told Bloomberg. “We’ll get more pulled-forward demand.”
With the market booming, there are other voices suggesting changes to how it operates.
One tax expert believes that the capital gains tax exemption for principle residences should be removed.
