The country's real estate markets may have received their first significant cooling method yesterday. Canada's chief banking regulator, The Office of the Superintendent of Financial Institutions (OSFI) is recommending for the mortgage stress level test to be raised to 5.25 percent, from the 4.79 current average rate for the country's top lenders.
This proposal by the OSFI means borrowers will be required to verify that they're fully able to pay for their loans at the new, higher rate, no matter the amount the lender is prepared to dole out. This will make it more difficult to qualify for home loans, lowering the number of capable buyers which in turn will relieve some of the pressure applied upward on Canadian house prices.
The OSFI said it will be look for approval and backing from the stakeholders regarding this proposal until May 7th, as the new rules would be applied as of June 1st.
Often referred to as the "stress test," the regulations were set in early 2018 and cooled down the housing market which was overheating and operating in frenzy at the time. The main principle of the stress test is to evaluate would-be purchasers' financials to verify if they are equipped to meet the mortgage payments should they they increase from time of mortgage signature.
At the present time, the average five year mortgage rate is at 4.79% but some borrowers have been able to secure rates of almost half that by shopping around somewhat.
OSFI was considering reconfiguring standards for the stress test prior to the pandemic, but these plans were parked, of course. The banking regulator said it also plans to "revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment."
This comes as the average price of a house in Canada increased by a whopping 25% so far this year, which has pushed many to demand change from policymakers.
"The current Canadian housing market conditions have the potential to put lenders at increased financial risk," OSFI said in a statement Thursday. "OSFI is taking proactive action at this time so that banks will continue to be resilient."