Canada Bank Regulator Relaxes Some Rules on Mortgage-Stress Tests

By Paul Vieira

OTTAWA--Canada's banking regulator said it would be easing some of the mortgage-financing rules intended to ensure home buyers didn't excessively stretch their balance sheets to acquire homes.

This would mark the second major change to Canada's mortgage-financing rules in as many weeks, with the country's Liberal government struggling in public-opinion polls because of cost-of-living issues such as housing affordability.

Canada's banking regulator, known formally as the Office of the Superintendent of Financial Institutions, said Wednesday homeowners looking to switch mortgages to a new lender would no longer be required to undergo another stress test to ensure they qualify.

The mortgage-stress test was introduced in 2018, aimed at slowing both house-price growth and consumer debt levels. The goal is to ensure prospective buyers would be able to afford interest payments in the event of a sharp rise in rates, the equivalent of 2 percentage points.

The regulator said in an email the lifting of the mortgage-stress test would apply to switches of uninsured mortgages that are renewed at a new lender. Mortgages in Canada require insurance if the buyer has less than a 20% down payment.

"We are listening to what we have heard from industry and from Canadians about the imbalance between insured and uninsured mortgagors at the time of mortgage renewal," the regulator said. "When we look at the data over time, we have observed that the prudential risks that this was intended to address have not significantly materialized."

OSFI earlier relayed details of the changes to Toronto's Globe and Mail newspaper. The regulator said the policy change would come into effect later this year.

Rob McLister, founder of MortgageLogic.news and a housing-market analyst, said that under the current system, a mortgage holder who wants to switch lenders at renewal would need to prove he has a certain level of annual income. Once the new policy kicks in, the level of income required on an average Canadian mortgage would drop about 13%.

Last week, Canadian Finance Minister Chrystia Freeland unveiled changes that also loosen mortgage-financing rules, which economists and analysts believe will deliver a sizable boost to the housing market starting next year.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

September 25, 2024 19:53 ET (23:53 GMT)

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