Thinking of applying for a mortgage? You now have until January 1st before new rules, designed to make it tougher for borrowers to qualify, take effect.<\/p>\n
The final version of Guideline B-20 \u2013 a banking regulation that increases the qualification requirements for mortgage borrowers and restricts certain types of mortgage arrangements \u2013 was officially announced this morning by the Office of the Superintendent of Financial Institutions (OSFI). Specifically, the changes will entail :<\/p>\n
All uninsured mortgage borrowers (those who pay more than 20% down on their home purchase), will need to prove they can handle a higher mortgage rate. They will need to qualify at either the five-year benchmark rate published by the Bank of Canada (BoC) (currently 4.89%), or at an extra 2% on top of their contract mortgage rate \u2013 whichever is higher. Prior to this rule change, only high-ratio (less than 20% down) borrowers were stress tested at the BoC\u2019s rate.<\/p>\n
Alternative lending arrangements such as co-lending (when multiple lenders provide a mortgage), and bundled mortgages (when home financing is combined with another financial product) have been banned. In the past, these practices could be used by lenders to help borrowers with less-than-A status get a mortgage.<\/p>\n
Lenders must now adhere to dynamic loan-to-value ratios when qualifying borrowers, based on specific housing market factors and risk. This means you may need to satisfy greater LTV requirements if buying a home in an ultra-hot neighbourhood where home prices may be inflated.<\/p>\n
Why Has OSFI Introduced These Rules?<\/strong><\/p>\n OSFI is Canada\u2019s federal banking watchdog and is responsible for regulating banks\u2019 lending practices and underwriting criteria. One of its main objectives is to reduce the amount of risk posed to banks via their mortgage business; given how high housing prices currently are and the amount of debt increasingly taken on by borrowers, Canada\u2019s lenders could be in a precarious position should the economy shift and mortgage holders default on their home loans.<\/p>\n Stated Superintendent Jeremy Rudin, \u201cThese revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada.\u201d<\/p>\n OSFI made an earlier attempt to reign in mortgage risk last October, when it implemented the stress test for high-ratio borrowers. However, those changes didn\u2019t seem to take much effect, as home sales and prices continued to skyrocket in Canada\u2019s hottest markets.<\/p>\n OSFI has also made changes on the lenders\u2019 side as part of their Guideline B-21. Those included tougher underwriting rules for the banks to follow, as well as limitations on insurance for their low-ratio mortgage portfolios. Unlike high-ratio mortgages, where insurance must be paid for by the borrower themselves, low ratio mortgages do not require insurance. However, many lenders would choose to insure them on their end (using a product called bulk insurance), so they could in turn bundle them up and sell them as low-risk, mortgage-backed securities (MBS). These MBS were an important funding method for lenders, especially smaller ones that don\u2019t have the diversified product lines offered by the big banks. OSFI has cracked down on all of these processes in its efforts to reign in risky borrowing.<\/p>\n Too Much, Too Soon?<\/strong><\/p>\n While previous efforts haven\u2019t done much to cool the housing market, many real estate experts and analysts have expressed concern that the latest round of B-20 could be too aggressive of an approach, especially given today\u2019s softer housing market. Sales conditions have slowed in both Vancouver and Toronto, following new taxes that target foreign buyers, speculative investors, and empty homes. The Bank of Canada has also recently hiked interest rates, making the cost of borrowing more expensive for variable mortgage holders.<\/p>\n Tim Hudak, CEO of the Ontario Real Estate Association, declared that the new measures would equate to a \u201cwar on home buyers\u201d, while other industry experts have expressed concern it will have a depressing effect on the economy, and will wipe out hundreds of thousands of jobs in the real estate resale and new build industries. A recent report from the Fraser Institute also found the OSFI measures could cause \u201cmore harm than good\u201d, stating the regulator has the tools it needs to control risk without going after borrowers.<\/p>\n Bad News for Vulnerable Borrowers<\/strong><\/p>\n There are also concerns that these changes will put the most vulnerable borrowers in more precarious debt positions \u2013 as they will no longer have access to bundled and combined products from A-lenders, they\u2019ll increasingly turn to alternative lenders, such as private financers, who typically offer some of the highest rates.<\/p>\n \u201cFor those who don\u2019t fit within the \u201cBig Bank\u201d criteria, it can be very difficult to obtain this kind of financing, and so bundled loans have been a great asset,\u201d says Mike Bricknell, mortgage broker with CanWise Financial. \u201cRestricting this type of loan will reduce these borrowers\u2019 options, sending them instead to the dark \u201cprivate\u201d loan market, where super-high rates and fees are the norm. In these situations, repayments tend to be interest-only, and can make it even more difficult for those in challenging financial situations to dig themselves back out.\u201d<\/p>\n How Will This Effect Mortgage Qualification?<\/strong><\/p>\n Combined with OSFI\u2019s new measures, the impact on home buyers could be punitive. James Laird, President of mortgage brokerage CanWise Financial, recently told Huffpo Canada that home buyers may see their affordability chopped by as much as 21%.<\/p>\n Let\u2019s assume a home buyer is purchasing a detached house in the City of Toronto, at the average price of $1,355,234 (according to September 2017 number from the Toronto Real Estate Board). They\u2019ve made a 20% down payment of $271,047, and are applying for today\u2019s lowest five year fixed mortgage rate of 2.83, amortized over 25 years.<\/p>\n Under the new rules, they will need to either add 2% to that contract rate, or qualify at the BoC\u2019s rate of 4.89% \u2013 whichever is higher. In this case, it\u2019s the latter.<\/p>\n That means our purchaser will need to prove they can carry a monthly mortgage payment of $6,238, compared to their actual monthly payment of $5,037.<\/p>\n