​Household credit risk growing ‘more fragile’: OSFI

The head of Canada’s financial system watchdog is sounding the alarm on the use of home equity lines of credit (HELOCs), which he believes may be “simultaneously fueling and helping Canadians afford rising home valuations.”

The head of Canada’s financial system watchdog is sounding the alarm on the use of home equity lines of credit (HELOCs), which he believes may be “simultaneously fueling and helping Canadians afford rising home valuations.”   “The use of HELOCs and non-traditional housing backed products can lead to greater and more persistent outstanding principal balances, increasing risk of loss to lenders,” said Peter Routledge, who runs the Office of the Superintendent of Financial Institutions (OSFI), in a speech in Vancouver on Tuesday.   “Further, it can be easier for borrowers to manage financial distress by drawing on their lines of credit to make mortgage payments.”   Routledge said such products can be helpful for consolidating debt at low interest rates, but cautions their widespread use can make it difficult for regulators to asses credit risk.   His comments come amid what many describe as a housing affordability crisis, with national home prices rising 24 per cent since the onset of the pandemic in March 2020, according to the latest Teranet-National Bank House Price index. As well, Bank of Canada Deputy Governor Paul Beaudry warned indebted homeowners of a possible correction sparked by an “influx” of investors.

As a result, Routledge said OSFI must “remain vigilant” as household credit risk is growing “marginally more fragile” and is calling for a more aggressive response to Canada's housing supply-demand imbalance.

In June, OSFI introduced a tighter stress test for uninsured mortgages, with a new minimum qualifying rate of 5.25 per cent.

Additional measures OSFI will be researching include, as outlined in Routledge’s speech, ensuring lenders test borrowers for adverse conditions, placing more scrutiny on property valuations, as well as establishing limits that take into consideration the risk of specific properties and markets.