Canada’s banking regulator has modified its controversial new mortgage stress-testing rule, ensuring home buyers will not have an unintended incentive to sign up for shorter-term mortgages.
The Office of the Superintendent of Financial Institutions published revised final guidelines Tuesday for its mortgage qualification rule, which requires buyers making down payments of more than 20 per cent of a home’s value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiated.
Some real estate and lending organizations criticized the proposal because they said it would give borrowers an incentive to favour shorter-term mortgages because they typically have lower interest rates, making it easier to pass the stress-test standard. Critics said it would leave borrowers in a riskier position because they would be more vulnerable to interest rate increases with mortgages that come up for renewal more often.