OSFI Proposes Tightening Mortgage Qualification Rules

OSFI proposes tightening the rules governing uninsured mortgage qualifications

• The Office of the Superintendent of Financial Institutions (OSFI) has proposed changes to rules governing the issuance of uninsured mortgages. Under OSFI's new proposal, the qualifying rate for uninsured mortgages would be the contract rate + 200 bps, or 5.25%, whichever is greater. The latter would represent a 46 bps increase over the current qualifying rate. They also announced a proposal to revisit the calibration of the qualifying rate at least once a year to ensure that it remains appropriate. They'll announce their final amendments to the qualifying rate on May 24th, with an in-force date of June 1st.

Key Implications

• Uninsured mortgages make up roughly 70-75% of recent issuance and about 65% of outstanding balances, so the policy is targeting a large portion of the market. We also note that with contract rates currently so low, qualification would default to this new, higher rate when the policy is implemented.
• These changes are likely to spur even stronger activity for the remainder of April and May, as buyers and sellers push to move ahead of the implementation date of the policy. With markets currently historically tight, this could add further fuel to home price growth in the near-term.
• We are likely to see some moderation in activity after the policy comes into effect, both from the policy itself and as the pull-forward of demand to beat its implementation unwinds. However, any softening should prove temporary, and this policy is unlikely to significantly alter market psychology or cause a steep or protracted drop in activity.
• When the B-20 stress test on uninsured mortgages was initially enacted in 2018, sales did decline for much of the year. However, unlike now, the Bank of Canada was in the middle of a rate hike campaign, taking their rate from 0.50% in mid-2017 to 1.75% by late 2018. And, by early 2019, markets had absorbed both the rate hikes and the B-20, and sales began to grow briskly.
• We also note that the shock to markets was much more severe back then, amounting to 220 bps (BoC posted rate – estimated average contract rate at the time), versus the 46 bps proposed now.
• Despite it being worse now than it was back then, affordability is clearly not too much of an obstacle in the current market, as sales continue to break records. As such, another relatively small deterioration in affordability (of roughly 4%) from the policy is unlikely to dent momentum.
• The policy could cause some shift down the value spectrum for buyers, given tougher qualification standards. This could weigh on average home prices in the near-term, as sales of less expensive units outperform. We note that Canadian average home prices dropped for four straight months in the wake of the B-20 in 2018. However, markets are much tighter now than they were back then, which should negate some of this pressure.
• The policy will also likely improve loan quality. And, because it applies to federally regulated financial institutions, it could cause an increase in the migration of loan demand to private lenders to skirt the higher qualification, much like what we saw in 2018.

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