Is another stress test for uninsured mortgages necessary?

High stress level

The Office of the Superintendent of Financial Institutions (OSFI) is proposing an additional Stress Test for Uninsured Mortgages (those with a down payment of 20% or more). Currently, only homebuyers who get insured mortgages face a stress test and must qualify at the Bank of Canada’s conventional five-year fixed posted rate.

About 4 out of every 5 mortgages in Canada are conventional, uninsured mortgages, with the big banks dominating the market. If OSFI expands the stress test as planned, conventional buyers could see their purchasing power reduced by 18%.



OSFI has also proposed prohibiting co-lending arrangements (also known as bundled mortgages) that “are designed or appear to be designed to circumvent regulatory requirements.” And the regulator has suggested requiring loan-to-value measurements be adjusted for local market conditions.

OSFI was seeking feedback on the proposals until Aug. 17, 2017 and we are sharing some key points below. The final guidelines will be issued in Fall 2017 and come into effect shortly thereafter.


Key feedback to OSFI submitted by PCMA:

  • An across-the-board application of the contracted-rate-plus-2% test as the minimum threshold for eligibility seems to be arbitrary and unreasonable. It unduly punishes both regulated (and indirectly regulated) lenders and borrowers.
  • The 200 basis points stress test will put a conventional mortgage out of reach for borrowers who may well be able to comfortably service their debt.
  • Is it necessary to specify a hard number as the threshold? 200 basis points may seem an appropriate reference point today, but its usefulness may decrease if rates move up substantially over the next several years.
  • If borrowers are unable to obtain the loans in the regulated marketplace, they will turn to the unregulated, or “grey” markets, where there is little supervision or intervention by government agencies. Lenders in these markets are less likely to be concerned about the borrower’s ability to service debt. We do not believe that borrowers who may well qualify for an uninsured mortgage but for the application of this stress test will be better served in the grey market.


“Extending stricter mortgage rules to all borrowers is a bigger risk to the housing market than higher rates”

Benjamin Tal, deputy chief economist at CIBC World Markets.


Policymakers should take the time to examine the data coming out of the 2016 changes. Only after assessing their impact in the current economic and interest rate environment, should they consider introducing more tightening of mortgage accessibility. We believe that industry members and the markets have yet to absorb and assess the full effects of the policy changes implemented in 2016:

  • the requirement for all borrowers having to qualify under maximum debtservicing standards based on the higher of the mortgage contract rate and the Bank of Canada conventional five-year fixed posted rate; and
  • the requirement for all insured mortgages to meet the eligibility that previously applied only to high ratio (greater than 80% LTV) mortgages.


Other branches of government have introduced measures that affect the market. The Government of Ontario in April of 2017 unveiled its Fair Housing Plan. And of course, in July of this year, the Bank of Canada increased its overnight lending rate, the first such increase in seven years. There is an expectation from many analysts that the Canadian market will continue to have further interest rate hike pressures.

The chart below shows that the housing market is responding to these and other government initiatives.

Cooling Market Graph

“The Canadian residential mortgage market is well regulated and fundamentally sound. We question whether further regulatory intervention is needed at this time.”

Roy Cocciollo


According to data compiled by the Canadian Bankers Association, arrears rates have remained remarkably stable over the past five years. This suggests that residential mortgage assets are not declining in quality and there is no urgent need to further tighten the rules.

If you are a borrower

and have a variable-rate mortgage or lines of credit tied to the bank’s prime lending rate you may be considering options and thinking about locking in your rate. More importantly, you need to have confidence in your mortgage plan. Work with an experienced mortgage broker who has access to a wide range of lenders and knows your situation.
The right mortgage for you will save you money and stress.

For first time home buyers looking for their Dream Home in 2017, it’s important to be aware of the increase in interest rates and the more stringent mortgage rules. If you have any other questions, give us a call and we’ll walk you through the mortgage process or visit

Thank you to the PCMA for sharing their reports.


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