January 2, 2018
The Office of the Superintendent of Financial Institutions Canada (OSFI) has published the final version of its Guideline B-20. The revised Guideline, which takes effect January 1, 2018, applies to all federally regulated financial institutions and establishes a new minimum qualifying rate (stress test) for uninsured mortgages. The minimum qualifying rate for uninsured mortgages will be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
This new guideline will require lenders to enhance their longterm value (LTV) measurement and limits to ensure an appropriate level of risk responsiveness. Federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve.
Restrictions will be placed on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.
A federally regulated financial institution is prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
What is the impact of these new lending requirements?
These new lending restrictions mean that 1 in 6 home owners/buyers will no longer be able to qualify for a new mortgage or a refinance where the down payment is at least 20%. Effective January 1, 2018 all mortgages underwritten by a bank or institution governed by OSFI will have to qualify their borrowers using at least the 5-year rate (which is close to 5% now).
Veranova anticipates this will have a slowdown in new mortgages and refinances and will have an upward push on delinquencies as the current mortgages come due for renewal or existing mortgages in default can’t refinance to get out of trouble. As a result the mortgage lending industry can expect an increase in the number of mortgage defaults across Canada. This impact will not come all at once, but rather have a staggered effect as homeowners, currently locked into a fixed rate agreement, come up for renewal.
The one caveat will be on the low ratio, uninsured mortgages underwritten by a credit union or other non OSFI governed lender. They do not operate under the same rules. In addition, this guidance may not impact mortgage broker lenders as most do not have a balance sheet and lending is insured.