Canada's Bank Watchdog Rebuffs Calls to Scrap Mortgage Stress Test




 

(Bloomberg) -- Canada's banking regulator said the country's mortgage stress test has helped prevent widespread defaults as interest rates rose this year, rebuffing calls to weaken or eliminate the measure amid a surge in homebuying costs.

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The Office of the Superintendent of Financial Institutions requires banks to ensure that borrowers can still qualify for their mortgages at a rate two percentage points higher than what the lender is offering, or 5.25% - whichever rate is higher at the time. After the Bank of Canada's latest hike earlier this week, that minimum qualifying rate may soon top 8%.

The bank watchdog on Friday pushed back on growing calls to lower or kill the stress test, rebutting the argument that mortgage rates may be peaking and that the test is putting "an undue burden on homebuyers."

"We see great risk in speculating on the mortgage rate cycle, and we do not consider the minimum qualifying rate to be a tool to manage the demand for housing," OSFI Superintendent Peter Routledge said in a statement. "We see the minimum qualifying rate as an underwriting practice that adds an important safety buffer to residential mortgage portfolios, the largest exposure Canadian lenders have on their books."

OSFI will announce the outcome of its annual review of the buffer in mid-December and start a broader review of residential mortgage and underwriting practices in January, Routledge said.

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