The recent move by federal banking regulators to keep the banks’ mortgage stress test unchanged is a positive for the Canadian banks’ credit quality, says Fitch Ratings.
In a new report, the rating agency said the Office of the Superintendent of Financial Institutions’ (OSFI) decision to maintain the mortgage qualifying rate — currently set at the greater of 5.25% or the mortgage contract rate +2% — was in line with its expectations and is supportive of the banks’ credit ratings.
“Regulation and capital requirements will continue to tighten around the margin, and the decision aligns with OSFI’s mandate to reduce Canadian banks’ capital and solvency risks, and insure they can extend credit amid economic weakness,” Fitch said.
While relaxing the test would reduce the cost of mortgages and improve housing affordability, this would also increase credit risks, given the deteriorating economic conditions, it said.
The decision to maintain the test, which serves as a buffer to help ensure that borrowers can keep up their mortgage payments in a rising interest rate environment, also follows OSFI’s move to increase capital charges for negative amortization mortgages and measures that have led banks to discontinue certain “innovative” mortgage products, Fitch added.