Why a Mortgage Stress Test?

The Mortgage Stress Test, set by the Office of the Superintendent of Financial Institutions (OFSI), first came into effect in 2016. At the time, it only applied to high-ratio insured mortgages and borrowers were stress tested against a “threshold” interest rate of 4.64%. In 2018, OFSI updated the Stress Test to incl_ude all new borrowers getting a mortgage at a Federally regulated institutional Lender.

While there’s been criticism about the test, a look at the 2008 U.S. financial crisis, which was all about “loose” thinking by Lenders making it too simple for borrowers, and it’s easy to recognize that the Stress Test is a prudent “safety” measure.

Recently, we saw that as interest rates went down the appetite for spending went up. This was clear with mortgage borrowers having the desire to own a home. The Stress Test brought in sober second thoughts in a hot market. It lessened global concern that Canada’s financial institutions were a “credit risk.” And Canada’s credit rating stayed high as international markets remained confident about Canada’s economic and lending institution stability.

Now, as interest rates are climbing, real or perceived, the Stress Test is helping keep /enders safe, consumers safe, and with that, our entire financial system safe.
As calls have come for OFSI to revise borrower qualifications, the question is … will rates move higher than they are today, or are they plateauing but remaining elevated for a while to then recede? Today, mortgage borrowers are stress tested at a rate of over 6%. It seems to be a sufficient buffer against the additional rate hikes expected over the next few months.

As current economic signals indicate that interest rates won’t be elevated for an extended period, the Stress Test continues to be an effective way to keep balance in our economy. But could the Stress Test be relaxed to adjust for what seems to be “peaked” rates?

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