Research

The new rules will extend stress-testing requirements for homebuyers to uninsured mortgages

By James Langton |

Changes to Canada's mortgage rules from the Office of the Superintendent of Financial Institutions (OSFI) should help cool the overheated housing markets and tighten lending standards, says Fitch Ratings in report published Thursday.

The new rules, which take effect on Jan. 1, 2018, will extend stress-testing requirements for homebuyers to uninsured mortgages, which "should result in more conservative bank mortgage underwriting and lead to stronger collateral in covered bond pools," the report says.

The new rules aim to promote responsible lending and to cool the housing market, the rating agency says. "OSFI's announcement is the latest in a series of macroprudential measures aimed at promoting responsible lending, which should slow the rapid home price growth in parts of Canada," the report adds says.

The report notes that a sharp housing market correction remains a key risk for the banking system. It also cautions that the new measures could push riskier borrowers to alternative lenders that are not federally regulated.

"Nonetheless, extending the stress test and documentation requirements will lead to more conservative underwriting and reduced borrower qualification generally, which is likely to cool price growth in the residential real estate market," the report says.

The credit profiles for the banks should not be significantly affected by the new rules in the short run, the report says. "However, this is a positive development to the extent that the new rules temper unsustainable price rises in the housing market," it says. "Fitch retains its view that Canadian banks' asset quality is at an inflection point but believes that asset quality deterioration should be manageable through the ratings horizon."