Canada's regulator announces new minimum qualifying rate for uninsured mortgages

·3 min read

The Office of the Superintendent of Financial Institutions (OSFI) is changing the qualifying rate on uninsured mortgages.

“Effective June 1, the minimum qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus 2 percent or 5.25 percent,” said OSFI in a release.

OSFI says it received over 170 submissions during the consultation period.

“It is clear that there are a wide range of issues facing homebuyers, including high indebtedness, rapidly rising home prices, housing supply, and competitive bidding,” said OSFI

“While some of the suggestions fall outside of OSFI’s mandate, we have included a summary of the input received and our response for information.”

OSFI also says it's launching a process to review the qualifying rate at least once a year, in December ahead of the busy spring market.

The banking regulator says the move will help promote post-pandemic financial stability, especially considering how red-hot many Canadian real estate markets have been.

"The current Canadian housing market conditions have the potential to put lenders at increased financial risk," said OSFI in April when the idea was first floated. "OSFI is taking proactive action at this time so that banks will continue to be resilient."

The regulator says the move will help protect the financial system in the event of a drop in income or rise in mortgage rates.

Change will have minimal effect

Ron Butler, a broker at Butler Mortgage, says the proposed increase will have minimal effect.

"This is a naked move to reduce mortgage qualification to stifle mortgage lending and that's 100 per cent OSFI's purview if they think lending is overheated, it's just good they have to wear it now instead of pretending it's fake consumer protection," he told Yahoo Finance Canada.

"This is an attempt to slow down the price growth in the Canadian real estate market plain and simple."

According to Ratehub.ca’s online mortgage calculator, a family with an annual income of $100,000 with a 20 per cent down payment and 5-year fixed mortgage rate of 1.78 per cent amortized over 30 years would qualify for a home valued at $651,000 under today’s 4.79 per cent qualifying rate.

Under the proposed stress test rate of 5.25 per cent, the family's maximum affordability would decrease to $618,000 for a difference of $33,000.

Earlier today Tiff Macklem praised OSFI for raising the rate and said it will add stability to the housing market.

Following OSFI's announcement, Finance Minister Chrystia Freeland said the change will apply to insured mortgages as well.

“The recent and rapid rise in housing prices is squeezing middle class Canadians across the entire country and raises concerns about the stability of the overall market,” Freeland said in a statement.

“We know that we need to take energetic action on housing supply and affordability in Canada.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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