Opening remarks by Assistant Superintendent, Ben Gully for MQR setting announcement December 2021

As OSFI committed to earlier this year, we are providing this annual public update on the minimum qualifying rate for uninsured mortgages. We are confirming that the current rate remains unchanged and will continue to be the greater of the mortgage contract rate plus 2 percent or 5.25 percent.

Mortgages are one of the largest exposures that most banks carry on their balance sheets. Consistent with the principles of OSFI’s Guideline B-20, we expect lenders to have sound mortgage underwriting practices in place. A key part of this is the minimum qualifying rate, which assesses borrowers’ ability to continue making their mortgage payments in the event of adverse condition.

Such an assessment is especially important in the current economic environment given growing household indebtedness and the uncertainty of the scope and pace of economic recovery from the pandemic. Applying the minimum qualifying rate helps to provide a margin of safety for lenders and borrowers against the potential for rising interest rates or changes in income, or costs such as an injury or illness, or unexpected increases in other expenses.

The current economic environment supports today’s decision to maintain the current minimum qualifying rate. Further, the current economic uncertainty reinforces the importance of sound mortgage underwriting in advance of potential disruptions to income.

OSFI is committed to reviewing the minimum qualifying rate in a transparent manner, and publishing the results at least every December. Throughout the rest of the year, we will continue to monitor the appropriateness of minimum qualifying rate and make further adjustments to it as conditions warrant.

OSFI is also committed to transparency about risks it sees as important. Housing is one of those risks, because it is fundamental to individuals, financial institutions, and the Canadian economy. Sharing our perspective and explaining our rationale on important risks contributes to conversations about the value of risk management for lenders and borrowers and, ultimately, public confidence in the Canadian financial system. We will continue to monitor housing markets across Canada and apply our supervisory focus to both changes in the market and lenders’ practices.

There are countless factors that influence borrowers’ decisions on housing. There are also many actions at all levels of government and in the private sector that influence these decisions. Often these interact with each other to create new uncertainties. House price volatility, driven by the combined forces of restricted housing supply and robust demand, are shaping the near and long-term risks that Canada and Canadians will need to face.

Household indebtedness remains an important prudential issue. This indebtedness is a significant vulnerability to lenders and the stability of the Canadian financial system. Higher levels of indebtedness raises borrower sensitivity to interest rate increases. This puts those highly leveraged borrowers, their lenders, and the system as a whole, in a more vulnerable position. Interest rate sensitivity, changes in borrower income, changes in housing prices (‘imbalances’), and lenders’ funding costs are therefore all relevant considerations when assessing the minimum qualifying rate.

I should also point to the Superintendent’s recent remarks noting the supply and demand imbalance in the housing market is a long-term prudential risk. A sustained, multi-year imbalance between housing demand and supply intensifies risks to Canada’s housing market and to Canada’s system of housing finance. The imbalance tends to drive price increases to ever-higher levels relative to income; this in turn induces more Canadians to resort to more leverage when buying a home. This is an issue that we will continue to monitor through our prudential lens and will work with our Federal financial safety net partners, all levels of government and the private sector to sustain Canadian housing as a cornerstone of strength for our country.

Through focused monitoring, transparent decision-making and timely actions, we are contributing to continued confidence in the safety and soundness of Canada’s financial system.

My colleague will now repeat these remarks in French and we will open the lines for questions.

Thank you.