With higher interest rates, is the mortgage stress test still required?

The mortgage stress test was a safety measure put in place to prevent mortgage defaults when interest rates rise. Now that the interest rates have risen close to the minimum threshold of 5.25% set in June of 2021, is it still reasonable to test home buyers at their mortgage rate plus 2%?

This was the question posed by TRREB CEO John DiMichele in the August market report. He also writes, “the Office of the Superintendent of Financial Institutions (OSFI) should weigh in on whether the current stress test remains applicable.”

In a recent speech by Peter Routledge, the Superintendent of OSFI, he responded to those asking for more clarity on where OSFI stands. “OSFI will remind our regulated institutions that periods of greater uncertainty require greater margins of safety.” He says, “Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”

While this sounds like OSFI is not going to budge on the mortgage stress test, Routledge specifically states that they are constantly evaluating and reviewing the mortgage stress test and its ability to determine home buyers’ creditworthiness.

It is safe to say that as long as we have the possibility of rising rates, the mortgage stress test is very likely to remain. It was introduced when we were in a low interest rate environment. It will likely remain in the current inflationary environment where the only tool used to combat inflation are rate hikes.