Report sounds alarm over softer mortgage stress tests

Proposed revisions to the Canadian mortgage stress test may raise credit risks at the big Canadian banks, says Fitch Ratings.

In a new report, the rating agency said that changes to the underwriting stress test will likely make it easier for uninsured borrowers to take on larger mortgages. That could, in turn, drive higher mortgage growth, and higher housing prices, Fitch said.

“While the potential…benchmark change by itself would not significantly increase borrower purchasing power, it could further stimulate real estate market activity in a resurging market, particularly in greater Toronto,” Fitch said.

Additionally, Fitch noted that the stress test change is coming amid a downturn in the economic outlook and a possible rate cut, which could provide further stimulus to the housing market.

Fitch had previously signalled that weakening macro-prudential policies could negatively impact its assessment of the operating environment for banks.

“In Fitch’s view, an economic downturn would magnify the negative effects of growing household debt burdens, potentially increasing banks’ credit losses,” it said, adding that rating implications for the banks would depend on how they respond to the changing conditions.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.