Office of the Superintendent of Financial Institutions
In 2017, OSFI strengthened its expectations for federally regulated lenders in its revised
Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures (Guideline B-20) to address increasing vulnerabilities resulting from changing lending practices and uncertain housing market conditions. This update included the following revised minimum qualifying rate for uninsured mortgages.
At a minimum, the qualifying rate for all uninsured mortgages should be the greater of the contractual mortgage rate plus two percent or the five-year benchmark rate published by the Bank of Canada.
The benchmark rate (five-year conventional mortgage rate) is published weekly by the Bank of Canada in
On January 24, OSFI
announced that it was reviewing the benchmark rate referenced in its minimum qualifying rate. The spread between actual contract rates and the current benchmark rate has widened recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed. Refer to the Annex for further background.
The Department of Finance, in consultation with the Office of the Superintendent of Financial Institutions and other federal agencies, has also reviewed the benchmark rate in the context of its minimum qualifying rate for insured mortgages.Footnote 1 Today, the
Minister of Finance announced that the current benchmark rate used in the minimum qualifying rate for insured mortgages will be replaced by the following new benchmark rate, effective April 6, 2020:
The Bank of Canada will publish the new benchmark rate every Wednesday, with the rate coming into effect the following Monday.
OSFI is proposing to adopt this same rate in the calculation of the minimum qualifying rate for uninsured mortgages. The new benchmark rate would replace the five-year conventional rate, and would be more representative of the broader market and responsive to fluctuations in actual contract rates.
In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmark rates used to qualify both uninsured and insured mortgages.
To facilitate implementation, OSFI is also proposing that this new benchmark rate be effective April 6, 2020 to coincide with the changes to the minimum qualifying rate for insured mortgages.
OSFI invites interested stakeholders to provide comments on the above proposal by email at
email@example.com by March 17, 2020.
OSFI will communicate final amendments to the benchmark rate for uninsured mortgages by April 1, 2020.
OSFI introduced the minimum qualifying rate for uninsured mortgages in guideline B-20 in 2012, and subsequently amended it when the revised guideline B-20 was released in 2017. OSFI maintained the benchmark rate in its minimum qualifying rate to address public consultation feedback, which highlighted the value of including a floor and called for greater alignment with the Government of Canada minimum qualifying rate for insured mortgages, which uses the same benchmark rate.
As noted in the
Guideline B-20 Information Sheet, OSFI observed modest improvements in mortgage underwriting quality following the implementation of the revised guideline. However, these metrics can change, and OSFI will continue to monitor credit quality closely.
Federally regulated mortgage lenders and the broader public have generally expressed support for the minimum qualifying rate, and have suggested that OSFI should only consider any changes very carefully. OSFI remains confident that the minimum qualifying rate, including the 2% buffer on the contract rate, is reasonable and prudent for uninsured mortgages given the potential for sudden changes in borrower circumstances, e.g. income loss, increased interest rates, or additional expenses. However, OSFI wants to be responsive to market developments that suggest the current benchmark rate may no longer be fit for purpose.
The current benchmark rate is the mode of the posted five-year conventional mortgage rates offered by the six largest banks. Posted rates have traditionally been about 200 basis points (or two percent) higher than actual five-year contract rates for residential mortgages. For this reason, OSFI viewed the current benchmark rate as a conservative floor for the assessment of borrower repayment capacity.
Recently, OSFI has observed that these rates are no longer moving in line with actual contract rates. The gap has widened to exceed two percent on a sustained basis, suggesting a less responsive floor than originally intended.
The Minister of Finance sets the minimum qualifying rate for insured mortgages through the National Housing Act, the Protection of Residential Mortgage or Hypothecary Insurance Act and associated regulations. The minimum qualifying rate for insured mortgages currently uses the same five-year benchmark referenced in guideline B-20.
Return to footnote 1