Canada’s top banking regulator, OSFI, is proposing to raise the mortgage stress test rate to 5.25% or 2% above the market rate whichever is higher. That’s an increase from 4.79% which is the current average posted rate at Canada’s biggest lenders. Thursday’s change by the Office of the Superintendent of Financial Institutions (OSFI) means borrowers will need to prove that their finances can pay for the loan at that higher rate, regardless of what a lender is willing to lend them.

The higher mortgage stress test rate would make it harder to qualify for a home loan, shrinking the pool of qualified borrowers and ultimately bringing down some of the upward pressure on house prices in the country. OSFI says it is seeking submissions from stakeholders about its proposal until May 7th, before the new rules would be put into place for uninsured loans as of June 1.

The banking regulator was looking into perhaps setting some other sort of benchmark for the stress test prior to COVID-19, but the pandemic stalled those plans. In addition to the higher rate, OSFI also says it plans to revisit the mortgage stress test rate at least once a year. The move by OSFI comes as the average price of a Canadian home rose by 25% in the year up until the end of February.

The Bank of Canada plans to keep its’ lending rate steady for at least the remainder of the year meaning the prime rate that is used to price variable rate mortgages should remain stable for the foreseeable future.

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