Canada tweaks mortgage stress test in move that could boost housing market

By Nichola Saminather and Fergal Smith

TORONTO (Reuters) - Canada on Tuesday announced a change to a three-year-old financial stress test designed to reduce risky mortgage lending, potentially reigniting housing markets the measure was meant to cool, and posing a challenge for the nation's central bank.

The change, shifting away from banks' advertised rates that tend to be higher than actual market rates to determine the minimum qualifying rate, could allow consumers to borrow more even as Toronto and Vancouver, Canada's two biggest housing markets, rebound.

James Laird, co-founder at Ratehub.ca, which compares rates on mortgages, insurance and credit cards, said the move will increase the central bank's concerns about stimulating the housing market.

"If they cut rates, fixed-rate mortgages will drop and... everyone will qualify for more and higher mortgages," he added.

While the stress test did help cool housing markets, a supply shortage is already lifting prices again.

The Bank of Canada warned this month that the coronavirus outbreak could hurt Canada's economy, after saying last month that a rate cut was possible if a slowdown in domestic growth persists.

A home buyer whose maximum monthly mortgage is C$3,000 can now afford a $519,000-home, from $503,000 previously, according to Stephen Brown, senior Canada economist at Capital Economics.

The new benchmark for home loans with downpayments of less than 20% will be the weekly median five-year fixed insured rate calculated from mortgage insurance applications, the finance department said in a statement. Taking effect on April 6, it replaces the Bank of Canada's five-year benchmark rate, based on banks' public rates.

Borrowers will still need to show they can afford a rate two percentage points higher than the benchmark.

Five-year market fixed rates are a little less than 3%, making the qualifying rate below 5%, Laird said. The Bank of Canada's posted five-year mortgage rate is 5.19%.

Canada introduced the stress test for high-ratio mortgages, which are insured by the government housing agency, in October 2016.

The Office of the Superintendent of Financial Institutions (OSFI) is also considering the same change to its stress test, introduced in January 2018, for mortgages with downpayments of more than 20%, Canada's main financial regulator said in a separate statement.

Canada's biggest banks did not immediately respond to requests for comment.

"Banks in Canada share the goal of ensuring that housing remains stable and well-regulated, while being accessible to those looking to buy homes across Canada’s diverse housing markets," the Canadian Bankers Association said in a statement.

(Reporting by Nichola Saminather and Fergal Smith; Editing by Tom Brown and David Gregorio)