Backgrounder – Minimum Qualifying Rate

Why does OSFI’s Guideline B-20 include “stress testing”?

For banks and other federally regulated lenders, residential mortgages are often the largest asset category on their balance sheets and a key source of credit risk (i.e., risk of non-repayment). Mortgages are also critical for the Canadian economy, representing about 10 percent of Canada’s GDP, and to Canadians in financing their aspirations of homeownership. It is because of these important aspects that OSFI expects lenders to ensure their risk assessments for these loans – or mortgage underwriting practices—are sound and reasonable. To do this, we require institutions to examine carefully whether borrowers are able to repay their loans for the life of their mortgage.

One tool that OSFI requires institutions to use is the minimum qualifying rate (MQR) – also known as the “stress test.” This and other expectations are set out in OSFI Guideline B-20 that federally regulated lenders are required to follow when granting an uninsured mortgage.

The MQR tests a borrower’s ability to continue to make their mortgage payments in the event of difficult economic circumstances including a rise in interest rates, fluctuating house prices, or a reduction of income such as an on the job injury or job loss.

By qualifying borrowers at a higher interest rate than the actual rate they have agreed to with their lender, OSFI is ensuring that lenders remain prudent and responsible with their lending practices. By insisting on these sound mortgage underwriting practices, OSFI creates a built-in margin of safety that strongly contributes to the soundness of Canada’s financial system.

OSFI reviews and communicates the minimum qualifying rate at least every December. Throughout the rest of the year, however, OSFI continues to monitor housing markets and mortgage practices and may make further adjustments as circumstances warrant.

A Brief History of Guideline B-20

In 2012, OSFI introduced its Residential Mortgage Underwriting Practices and Procedures Guideline (B-20) to set out expectations for sound residential mortgage underwriting for federally regulated lenders. The original Guideline included an expectation that lenders would test borrowers’ capacity to pay their mortgage in the event of adverse conditions.

In 2016, OSFI reminded lenders of its underwriting expectations in the form of a public letter. When OSFI continued to see examples of relaxed mortgage underwriting at some lenders, it issued an update to Guideline B-20 in 2017 that introduced the minimum qualifying rate, which came into effect in January 2018.

In June 2021, OSFI introduced a revised minimum qualifying rate for uninsured mortgages. In its announcement, OSFI committed to review the calibration of the minimum qualifying rate at least every December.

OSFI updates to Guideline B-20 clarify and strengthen expectations in response to risks in the Canadian economy and mortgage market, including the evolution of lending practices and products.