(Bloomberg) -- Canadian homeowners have weathered the current credit cycle much better than the country’s bank regulator expected a year ago.
“Households have managed through this quite well,” Superintendent of Financial Institutions Peter Routledge said Wednesday. “There is no evidence to suggest credit’s going to really deteriorate in a material way that might affect the broader economy or might affect the housing market.”
While it’s too soon to “declare victory,” he said, “we’ve been pleasantly surprised at how well it’s worked out,” adding that stronger underwriting standards have helped.
Routledge, speaking with reporters following a speech at the Global Risk Institute summit in Toronto, noted that 76% of the country’s mortgages outstanding as of February will come up for renewal by the end of 2026.
While some recent changes the federal government has announced to make mortgage borrowing easier could lead to a “modest increase in risks,” Routledge said he’s not concerned they’ll pose a material risk to the financial system.
Prime Minister Justin Trudeau’s government said last month it will make 30-year home loans available to all first-time buyers and to those acquiring newly built homes. Until this year, buyers who required government-backed default insurance on their mortgages were limited to 25-year amortizations.
Ottawa also said it will begin allowing mortgage default insurance on homes worth as much as C$1.5 million ($1.1 million), an increase from the current cap of C$1 million. As long as buyers purchase insurance, they’ll be able to bid on more expensive homes even if they have less than a 20% down payment. Those changes will take effect Dec. 15.
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Separately, the Office of the Superintendent of Financial Institutions said it will no longer require borrowers with uninsured home loans to undergo a second stress test when doing a straight switch to a different loan provider. The federal stress test is designed to ensure that borrowers can handle financial shocks such as higher interest rates or household expenses.
Routledge said OSFI made the change after hearing from many Canadians that the rule was an unfair barrier to being able to switch lenders.
Capital Rules
On bank capital, he said the regulator remains committed to implementing a suite of international rules even after putting some of them on hold earlier this year.
In July, OSFI said it would delay by one year key rules on “capital floor levels,” which are part of the global Basel III accords to increase financial system stability. The specific rules will eventually require Canadian banks to calculate more of the risks in their loan books using a standardized model, in lieu of internal methods.
Canada has made more progress on Basel III than other countries, Routledge said, adding: “some of our peer signatories to these reforms inconveniently have further progress to make.”
In the US, where the reforms have become a hot-button issue as lobbyists argue that overly restrictive rules could curtail lending and derail the economy, the Federal Reserve has recently faced renewed opposition to its latest proposal on the topic.
OSFI’s delay to the capital-floor changes came after some analysts argued the rules might stifle loan growth when Canadian households are contending with rising unemployment and higher debt-servicing costs.
Routledge said Wednesday that some of those concerns were overblown, noting that according to OSFI calculations, the capital-floor rules are actually “capital-neutral” for Canadian banks.
Next July, he said, the OSFI will consider whether to delay the rules again.
