The Office of the Superintendent of Financial Institutions (OSFI) is considering replacing Canada’s controversial mortgage stress test with a new risk management approach focused on the overall mortgage portfolios of banks rather than individual borrower qualifications. This shift could significantly reshape the housing market by moving from evaluating individual borrowers to managing institutional risk.

Introduced in 2016, the mortgage stress test has been both praised for protecting Canada’s financial system during periods of low interest rates and criticized for limiting homeownership opportunities. It requires borrowers to qualify at either 5.25% or their contract rate plus 2%, whichever is higher. While it helped maintain low default rates during recent rate hikes, economic changes like inflation and trade tensions suggest a more flexible, portfolio-based approach could better address current market challenges.

OSFI’s proposed new method would limit banks to issuing no more than 15% of their mortgages to borrowers with mortgage debt exceeding 450% of their annual income. This shift would move risk management responsibility from individual borrowers to banks, encouraging more strategic lending practices.

The potential changes could affect Canada’s real estate market in various ways, including making mortgages more accessible for some while creating new challenges for borrowers with high debt-to-income ratios. The shift also reflects Canada’s cautious history with mortgage regulation, influenced by past market crashes.

As OSFI continues to evaluate this change, its impact on affordability and overall market stability will be significant. Whether this represents the end of the stress test or the start of a new hybrid approach remains to be seen, but it’s clear that Canada's mortgage regulation will evolve in response to emerging economic realities.