Canada’s banking regulator today unveiled in October final changes to its mortgage underwriting standards—Guideline B-20—that will further tighten lending standards and affect borrowers and lenders alike.
The most wide-reaching change announced by the Office of the Superintendent of Financial Institutions (OSFI) is the establishment of a new minimum qualifying rate, or “stress test,” for borrowers making a down payment of more than 20% of the home’s value. Previously, stress test requirements only applied to insured fixed rate mortgages (those with down payments of less than 20%) and most variable mortgages and terms less than five years regardless of down payment.
For 20% down fixed rate borrowers, this stress test will reduce borrowing capacity by about 20%. This is, thankfully, a small portion of the total market and will impact few of our clients.
The stress test requirement, which comes into effect on January 1, 2018, goes a step further than the current regulations already in force for insured borrowers in that it applies the stress test to the higher of the benchmark rate or 2% above the contract rate. For the past year, this has been only the benchmark rate, currently 4.99%. For fixed rate morgages at 3.39% the mortgage would be stress tested at 5.29% instead of 4.99% today.
This will have a 2-3% impact on borrowing ability.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” Superintendent Jeremy Rudin said in a press release.
Earlier in October Rudin hinted that significant changes were coming in order to address risks the regulator sees as a result of high household debt, and high real estate prices coupled with historically low interest rates.
“We are not waiting to see those risks crystallize in rising arrears and defaults,” he said in his October 3 speech.
There are some additional regulations that apply only to a select few types of mortgage applications that usually would be labelled as “sub-prime” or “B” lenders.
Lenders will be required to enhance their loan-to-value measurement and adhere to appropriate LTV ratio limits “that are reflective of risk and are updated as housing markets and the economic environment evolve.”
Financial institutions will be prohibited from arranging a mortgage, or combination of a mortgage and other lending products, with another lender where the intent is to circumvent LTV ratio limits. But brokers can still do it, so long as the borrower qualifies for both mortgages (i.e., their debt ratios meet both the first mortgage lender’s and second mortgage lender’s guidelines).
Industry Response:
Industry stakeholders expressed concerns that the more stringent stress test could slow down the housing market more than anticipated. At Mortgages for Less we don’t expect this to have a dramatic impact in Alberta, but we may see some reductions in home buying activity in the top-end of the market.
Paul Taylor, President and CEO of Mortgage Professionals Canada, was encouraged by at least one concession that OSFI had made.
“I was pleased that OSFI agreed with our recommendation not to create a prohibition on all co-lending activities and instead clarified that the restrictions only apply to arrangements that are designed to circumvent existing laws or policies,” Taylor said.
“I am, however, disappointed with the decision to implement a new stress test at whichever is greater of 200 basis points above the contract rate or the benchmark rate. I believe the new qualifying rate will have negative implications for the Canadian mortgage finance market and the national economy as a whole.”