New report calls stress test for uninsured mortgages ‘unnecessary’

Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), wants homebuyers with uninsured mortgages to qualify with a stress test. A recent report from the Fraser Institute says the stress test is “unnecessary” and “will do more harm than good.”

There is already a stress test for insured mortgages, which we think makes sense because if you put down less than 20% and need an insured mortgage, then you should have to prove you can afford the payments by qualifying for a higher rate.

Currently, if you put down 20% or more, you don’t need to insure the mortgage and you are not subject to a stress test. If OSFI puts a stress test in place for uninsured mortgages, then putting down less than 20% becomes more attractive in some cases.  

The report, “Uninsured Mortgage Regulation: From Corporate Governance to Prescription,” states that OSFI wants buyers who put at least 20% down to qualify for a rate 2% higher than the agreed upon rate.

“This proposed stress test for financially sound homebuyers is unnecessary and will do more harm than good—Canadian homebuyers will pay the price,” says Neil Mohindra, a public policy consultant and author of the report.

Here are a few of the potential negative effects of the uninsured mortgage stress test:

• In a higher priced market, buyers will find their access to different mortgage options more limited.
• It could force buyers to end up with a less desirable home even though they could technically afford their first choice without the stress test.
• Buyers may seek out less regulated lenders funded by private investors. These companies tend to have higher rates.
• It makes short-term variable loans a more attractive option, but compared to long-term fixed-rates, these are more vulnerable to rate fluctuations.
• There may be less competition in the mortgage lending industry because niche lenders may feel like they can’t compete with larger institutions. The report uses a lender who works with business owners as an example.

Overall, a stress test for an uninsured mortgage can affect affordability and promotes riskier market behaviour.

And what would happen with buyers who have already purchased preconstruction? There must be first-time buyers out there who saved and put down 20% specifically to avoid having to pay mortgage insurance and also to avoid the stress test.

Sure, the buyer was pre-approved at the time of purchase, but the home won’t be built for a year or two. When closing time comes, they need to qualify for their mortgage, but now they may be subject to a stress test that puts the home they purchased out of their affordability range.   

If the stress test for uninsured mortgages does become a thing, we hope there is protection for everyone that has already purchased preconstruction!