New Mortgage Regs Could Stress Buyers
Yesterday, the Office of the Superintendent of Financial Institutions Canada (OSFI) released the final version of Guideline B20 – Residential Mortgage Underwriting Practices and Procedures, effective January 1, 2018. The Guideline applies to all federally regulated financial institutions.
According to the release:
The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.
What does this mean to you, as a borrower? According to the OSFI release:
- Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%. This is also referred to as the ‘stress test’ – in other words, you’ll need to qualify at a higher interest rate in order to secure uninsured mortgage financing starting Jan.1.18.
STRESS TEST EXAMPLE:
Let’s say you’re hoping to borrow a mortgage of $100,000, with a 5 year term, and a 25 year amortization:
A Major Bank’s 5 year rate today is 3.39% – so the mortgage payment would be $493.48
Bank of Canada’s 5 year benchmark rate today is 4.89%, so the mortgage payment would be $575.36,
4.89% is only 1.5% higher than that Bank’s rate (which would be considered the contractual rate in this example) so we would have to base it on the contract rate plus 2% or 3.39% + 2% = 5.39%
Contract rate +2% = 5.39%, so the mortgage payment would be $604.00 per month.
Instead of qualifying at $493.48 per month, the borrower would need to qualify at $604.00 per month, and for some folks, that difference might be the deal breaker for financing.
- Loan-to-value (LTV) ratio limits must be established by all federally regulated financial institutions and they must stick to appropriate limits that reflect the level of risk involved. Limits must be updated as housing markets or economic environments change.
- In addition to the above, lending arrangements which are designed or appear-to-be-designed to go-around these loan-to-value limits – or any other limits or laws – will no longer be tolerated (ie. the use of a combination of mortgage and other loan products in order to circumvent LTV or other limits.)
Superintendent Jeremy Rudin offered, “These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada.”