Commentary

OSFI Prudently Maintains the Minimum Qualifying Rate Safety Buffer for Uninsured Mortgages

Banking Organizations

Summary

On December 15, 2022, the Office of the Superintendent of Financial Institutions (OSFI) announced that it is maintaining the current Minimum Qualifying Rate (MQR) for uninsured residential mortgages. The MQR is an important measure that OSFI utilizes in ensuring that federally regulated financial institutions (FRFIs) amass safety buffers to improve the resiliency of the financial system.

Key highlights include the following:

-- Following its December annual review, OSFI maintained the MQR on uninsured mortgages at the higher of the contract rate plus 2.0% or 5.25%.

-- At current interest rates, FRFIs are being required to stress test borrowers using the contract rate plus 2.0% because it will be above the 5.25% floor. This effectively reduces the mortgage amount a borrower can obtain.

-- DBRS Morningstar views OSFI's MQR announcement positively since the mortgage stress test has effectively added a margin of safety that improved borrowers' ability to absorb interest rate increases.

“While the current MQR requirement puts a heavier burden on homebuyers, DBRS Morningstar views OSFI's decision on the MQR positively because a reduction in, or the elimination of, this critical safety buffer would increase risk in the financial system during a period of heightened macroeconomic uncertainty, including a potential recession,” said Carl De Souza, Senior Vice President, North American FIG.

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