Canada’s federal banking regulator has released its second, Annual Risk Outlook. The Office of the Superintendent of Financial Institutions (OSFI) is looking at whether to extend its mortgage guidelines, with an eye to reducing risk.
OSFI has identified, what it considers, nine “significant risks facing Canada’s financial system.” A potential downturn in the housing market tops that list.
"OFSI is preparing for the possibility, but not predicting, that the housing market will experience sustained weakness throughout 2023," said superintendent Peter Routledge.
High interest rates are the key concern. Higher borrowing costs present the increased possibility of defaults. Credit quality, however, so far looks quite strong and residential real estate remains sound, according to Routledge.
"What's interesting now is how benign conditions have remained. Underlying that is a very strong economy … And Canadians are servicing the higher cost of debt quite handily."
OSFI says it is reviewing its B20 mortgage guidelines in order to be better prepared for future risks. Its existing guidelines apply to all new mortgage originations at federally regulated lenders, including both new purchases and refinances.
OSFI is also taking a closer look at variable rate fixed-payment mortgages, which keep monthly payments the same even as rates rise by putting a bigger portion of each payment toward interest. However, some borrowers aren't even covering interest costs, and banks are stretching out the amortization period.