While prospective homebuyers didn’t get any relief recently from the Office of the Superintendent of Financial Institutions (OSFI) as it maintains its mortgage stress test requirements, DBRS Morningstar sees the move as a sound choice amid rising systemic risk.
In a new report, DBRS welcomed OSFI’s decision on Dec. 15 to maintain the minimum qualifying rate (MQR) for uninsured mortgages at its current level — at the higher of the mortgage rate plus 2.0%, or 5.25%.
In the current environment, maintaining the stress test is prudent, DBRS said, “considering such factors as high household debt levels and still-elevated housing prices, along with reduced disposable income from high inflation and rising interest rates.”
The report noted that the mortgage stress test has “effectively added a margin of safety that has improved borrowers’ ability to absorb some of the impact from the rapid and aggressive interest rate hikes since March 2022, and helped to keep mortgage default rates near historic lows as Canadians have been able to continue paying their mortgages.”
Amid higher rates, the stress test reduces the amount that households can borrow.
“While the current MQR requirement puts a heavier burden on homebuyers, DBRS Morningstar views OSFI’s decision on the MQR positively because a reduction in, or the elimination of, this critical safety buffer would increase risk in the financial system during a period of heightened macroeconomic uncertainty, including a potential recession,” DBRS said.
DBRS also noted that OSFI’s decision to maintain the mortgage stress test follows an earlier announcement that the regulator has decided to raise the capital buffer requirements on the big banks, starting in February.
Additionally, OSFI is scheduled to undertake a broader review of residential mortgage and underwriting practices, including the stress test, in early 2023 “to ensure that these requirements remain relevant,” the report added.