Government Suspends 2020 Stress Test Changes & More

Government Suspends Stress Test Changes & More

If you read my recent blog post Mortgage Stress Test Changes from earlier this month, you are aware that as of April 6th, 2020 those looking to qualify for a mortgage with less than 20% down payment were required to qualify for a New Benchmark Qualifying Rate.

This qualifying rate was to go from 5.19% to 4.89% allowing for you to increase your affordability by almost 3%. To break it down, this means that if you previously qualified for a mortgage of approx. $500,000 you would now qualify for a mortgage of approx. $515,000.

Given the current state of the market as a result of COVID-19, the Office of the Superintendent of Financial Institutions (OFSI) required emergency changes to take place, including a suspension to the planned updated of the mortgage stress test.

The planned change of the stress test was to have the rate be more reflective of real world lender rates as opposed to the regular posted rates. Unfortunately these changes have been halted given the daily changing economic market. In turn the Bank of Canada has lowered rates immensely.

In addition to cancelling the changes in the mortgage stress test the government has taken various other initiatives to allow banks to continue lending during such an unsettling time through changes to Domestic Stability Buffers (DSB) and halting share buy backs and dividend cuts.

The Domestic Stability Buffer (DSB) that is normally required by Domestic Systemically Important Banks (D-SIBs) has been dropped. Regulators have asked for a decrease in the Domestic Stability Buffer and Capital Buffers to help provide more cash flow. The resultant increase in capital not impacting their stability is crucial as D-SIBs are extremely important banks that are required in order for our country to continue operating.

For reference, a Domestic Stability Buffer ensures that banks are holding back enough money to protect against any potential risks and vulnerabilities. The buffers are used during unexpected times of stress, such as with what we are experiencing with COVID-19, to avoid the sale of assets or a large reduction in lending.

Domestic Stability Buffer were increase to 2.25% of their risk weighted assets as of April 30th, 2020, however given in the wake of COVID-19 this hike was fully cancelled and replaced with a cut of 1.25%. This was required to provide emergency funds for the Domestic Systemically Important Banks allowing for an estimated $300 Billion in additional lending capacity according to the OSFI.

OFSI has also requested that banks use their lending capital for households and business as opposed to using the capital for shareholders. In order to do this, OFSI has asked banks to put a hold on share buybacks and dividend hikes. This request however, may involve banks passing this extra capital over to borrowers.



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