An early effect of interest-rate increases is expected to be the long-debated stress test, otherwise known as the “mortgage qualifying rate” and the creation of the Office of the Superintendent of Financial Institutions (OSFI).
The OSFI is an independent federal agency that supervises hundreds of financial institutions and over 1,000 pension plans in Canada.
The “stress test” was designed to cool the real estate market by requiring homebuyers to show they can manage an interest rate of 5.25 per cent or the rate in their mortgage contracts plus two per cent…whichever is higher. It was introduced in 2016. With the Bank off Canada’s two recent increases, five-year fixed-term mortgages are running around 4.25 per cent. Adding two per cent to that takes the qualifying rate to 6.25 per cent, with more increases expected this year.
It is being seen as cooling a market that’s already cooled.
Typically, the OSFI adjusts the stress test near the end of each year, but with the current situation that is expected to happen sooner. One option is to reduce the stress test rates. Another is to eliminate the two per cent added to the contract rate.
The OSFI is an independent federal agency that supervises hundreds of financial institutions and over 1,000 pension plans in Canada.