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Canada’s banking regulator is proposing to tighten mortgage qualification rules to make it more difficult for home buyers to secure financing, a move that aims to alleviate the risks of financial stability stemming from an expanding housing market.
The Office of the Superintendent of Financial Institutions has said it will establish a new benchmark interest rate used to determine whether people qualify for an unsecured mortgage at a minimum rate of 5.25 percent. The current limit, based on the published rates of the six largest creditors in the country, is 4.79 percent.
“A good underwriting of residential mortgages is always important for the security and stability of financial institutions,” said Jeremy Rudin, head of the Ottawa-based agency, in a statement. “Today is more important than ever.”
The change comes amid a rise in house prices, which is increasing concern among policymakers and economists. Cheap mortgages and new remote working conditions have sparked a frenzy of demand for more spacious homes, with property hunters raising prices across the country.
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The Canadian Real Estate Association estimates that prices have risen 17% nationwide in the past 12 months. Twelve major markets – or about a quarter of the total – saw price gains of more than 30 percent.
OSFI said that real estate market conditions “have the potential to put creditors at greater financial risk”, forcing regulators to take “proactive actions”. The regulator said it will review the qualification rate calibration at least once a year to ensure that it remains appropriate. The plan is to implement the changes on June 1, after consultations.
The change impacts the uninsured mortgage space that is overseen by OSFI. The federal government is responsible for qualifying mortgages for insured mortgages. There was no indication in the statement that the government planned to follow the change, and requests for comment from the finance department were not returned immediately.
An unintended consequence could be to temporarily accelerate the market as buyers enter before changes are implemented.
“We can see an even hotter housing market as a result of the OSFI move,” said Derek Holt, an economist at Bank of Nova Scotia, by email. “We will have more demand pulled forward.”
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