Ads Google

Changing the stress test may raise credit risk for banks says Fitch

by Steve Randall on 26 Feb 2020

The proposed change to the federal mortgage guidelines that would reduce the stress test requirement for borrowers could adversely affect the credit risk of Canada’s big banks.

That’s according to Fitch Ratings which says that the lower threshold for lending along with the potential for further interest rate cuts amid concerns of economic slowdown, could spark activity in the housing market and raise the overall risk for lenders.

Currently, the stress tests require that home buyers demonstrate their ability to afford a mortgage at a benchmark rate based on the "posted" median of 5-year fixed rates at large banks, which is roughly 5.19%, or 250bps (basis points) higher than current market rates.

The proposed stress test would replace this posted rate with a more market-based benchmark, plus a buffer of 200bps, or approximately 4.8% based on current rates.

Fitch warns that if borrowers take on larger mortgages and, while the change to the B-20 mortgage guideline alone will not “significantly increase borrower purchasing power” it could ignite the market – especially in Toronto – supporting the current surge in prices.

Along with other household debt levels, the risk to the banks’ credit losses would come from an escalating of household debt coupled with an economic downturn.



Post a Comment



Most Trending News

Training new skilled trades workers must be a priority
News

While there has been a deceleration in new home sales, we must keep the pedal to the metal and continue to train skilled trades workers for the future.

Read More
To build 1.5M homes, we must think outside the box
News

Many jurisdictions in the U.S. have been thinking outside the box to boost the housing supply. Here in Ontario, we’d be wise to follow suit.

Read More
Upcoming free event: Canadian Real Estate Investment Summit
News

This free summit will feature top experts in Canadian real estate who will share their knowledge on a broad range of topics. It will be presented on Sat. Jun. 18th from 12pm-3pm.

Read More