Federal regulators’ latest efforts to dampen the red-hot Canadian housing market are a positive for Canada’s big banks, says Moody’s Investors Service.
Last week, the Office of the Superintendent of Financial Institutions (OSFI) proposed raising the qualification standard for uninsured mortgage loans, meaning borrowers would have to be able to demonstrate the ability to make their mortgage payments amid higher rates.
OSFI said current conditions in the housing market are putting lenders at increased risk, and said it was taking action to ensure the banks remain resilient.
“The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances, such as the reduction of income or a rise in mortgage interest rates,” the regulator said.
In a research note, Moody’s said that an increase of the qualification standard is a positive for the Canadian banks. The new test “will reinforce their sound mortgage underwriting practices and reduce the likelihood of asset quality erosion, and future credit losses in a time of rapidly rising housing prices in Canada,” Moody’s said.
The rating agency noted that, while a large share of Canadian mortgages carry government-backed mortgage insurance, the government is seeking to reduce its exposure to the housing market over time.
“Therefore, we expect the proportion of uninsured mortgages to increase once the government’s pandemic response winds down,” it said.
In the meantime, it said the proposed higher hurdle rate will reinforce strong mortgage underwriting standards, “thereby limiting credit losses that banks cannot shift to the government.”