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OSFI has published its update for the tightening of mortgage lending regulations known as Guideline B-20 and set the date that it will apply.

The revised Residential Mortgage Underwriting Practices and Procedures will take effect from January 1, 2018 and include several key changes that the regulator says is part of its expectation that federally-regulated mortgage lenders remain vigilant in their underwriting practices.

• Stress test - 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%.
• Enhanced LTV measurement - federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.
• Restriction of certain lending arrangements -  federally regulated financial institutions 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.

“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.

The full guideline update is available from the OSFI website. 

Real Case Scenario

Here below is a case study of the potential impact to a typical borrower:

A couple in the Greater Toronto Area wish to purchase a home for $1,000,000 and use a $200,000 down payment.  They need an $800,000 first mortgage (uninsured) and are quoted a rate of 3.39%. They currently make $150,000 combined annual income and qualify for this loan.

Under the new rules effective January 1, 2018, the couple would not qualify for this loan. In fact, they would need to prove an extra $25,000 in combined annual income for the same loan. Alternatively, they would have to provide additional equity of $125,000 (total equity of $325,000).

Each government policy has unintended consequences. The drafters of these regulations likely did not consult a mortgage broker or a borrower to determine the impact to a typical borrower from an arbitrary stress test.

Industry reacts to OSFI B-20 update

The mortgage and real estate industry has been quick to react to the updated mortgage lending guidelines known as B-20 which have been published by OSFI.

The rules come into effect from January 1, 2018 and will include a stress test on uninsured mortgages at 2% above the agreed contract rate.

Reacting to the update, James Laird, co-founder of Ratehub.ca and president of CanWise Financial said: “Those of us working in the mortgage industry question if now is an appropriate time to introduce more regulation which will cool markets across the country further.”

He added that the impact of previous policy changes designed to cool the housing market and tighten mortgage lending have still to be assessed.

RBC economist Robert Hogue said that, although the changes are not a surprise, they will have a real impact on the market.

“We expect that, following a brief run-up in activity fueled by buyers rushing to lock-in existing qualifying criteria, the change will have a dampening impact on the housing market shortly after it comes into effect in January. It has the potential initially to rock the market because non-insured mortgages represent a large share of the mortgage market,” Hogue wrote.

Ontario Real Estate Association CEO Tim Hudak said that the province has borne the brunt of government interventions and believes that the stress test for mortgages is regulation overkill.

“It’s time for governments to hit the brakes on more demand side policy interventions and take a wait and see approach. Ontario’s housing market is too important to the provincial economy to move ahead with unnecessary regulation that will hurt the dream of home ownership,” he said.

First National Financial issued a statement saying that although it is not a Federally Regulated Financial Institution, the nature of its operations and commitment to the highest quality underwriting standards will require it to follow the Guideline.

It said that the stress test on uninsured mortgages to 2% above the contract rate will have a significant impact.

“The Company believes all mortgage lenders, including First National, will see a decrease in conventional single-family market activity levels as a result of this change,” it warned.