The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, has firmly rejected calls to remove the stress test for interest rates when switching uninsured mortgages. Speaking before the parliamentary finance committee, Mr. Routledge confirmed that OSFI does not plan to eliminate this requirement for uninsured home loans.

Disparity Between Insured and Uninsured Mortgages

Borrowers with insured mortgages are exempt from the stress test when switching lenders, unlike those with uninsured mortgages. The latter must qualify based on the minimum qualifying rate of 5.25% or two percentage points above their negotiated rate.

Federal MP Adam Chambers highlighted a disparity in the treatment of insured and uninsured borrowers. Mr. Routledge responded that this disparity is tolerated due to the stringent principles underpinning OSFI’s credit assessment criteria.

Recommendations from the Competition Bureau

The Competition Bureau recommended eliminating this stress test, but OSFI rejected the suggestion. OSFI explained that insured mortgages pose less risk to financial institutions since the credit risk is borne by the insurers, not the lenders.

OSFI's Concerns

OSFI is particularly concerned about variable-rate mortgages with fixed payments, offered by most major banks. These mortgage products fix payments regardless of rate fluctuations, potentially leading to a negatively amortizing loan.

Mr. Routledge noted that the number of households in this situation has decreased from 270,000 to 175,000 over the past 18 months. He was also pleasantly surprised by the low level of mortgage defaults, attributing this to the rigorous application of the mortgage stress test.

Conclusion

The maintenance of the stress test for uninsured mortgages aims to protect the financial system from credit risks. Although this creates a disparity between insured and uninsured borrowers, OSFI believes this measure is necessary to ensure long-term financial stability.