Today the Office of the Superintendent of Financial Institutions Canada (OSFI) made good on its promise to introduce tougher residential mortgage guidelines for home mortgages in Canada. These new mortgage rules will mean changes for Canadian home buyers.
The updated B-20 guidelines (on Residential Mortgage Underwriting Practices and Procedures) will come into effect on January 1, 2018, and will apply to all federally regulated financial institutions. According to OSFI, these changes reinforce the institute’s “expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices.”
New stress test for uninsured mortgages
Under these new mortgage rules, there is a new stress test for all new and refinanced uninsured mortgages (housing loans with more than a 20% down payment) with new lenders. Now, all applicants for mortgages in Canada must qualify for a mortgage based on either the five-year benchmark rate, published by the Bank of Canada or the contractual mortgage rate plus 2%, whichever is greater.
This will certainly make it much harder for some potential home buyers to qualify for a mortgage loan or secure good mortgage rates. However, if a current homeowner opts to refinance a mortgage with their current lender they will not be subject to these new B-20 mortgage guidelines, as no new underwriting process will be required, explains OSFI Superintendent Jeremy Rudin.
Lenders now have stricter LTV ratios
Under these final guidelines, federally regulated financial institutions will now have higher (or as OSFI defines it: “appropriate”) loan-to-value ratio limits that reflect the lender’s risk. These LTV ratios may evolve and update in order to reflect current housing markets and economic environments.
No workarounds anymore
OSFI is also closing a loophole that allowed federally regulated financial institutions to arrange additional financing with another lender in order to circumvent an institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
Expected changes will slow Toronto’s housing market even further
While these new mortgage rules were expected, many in the Toronto housing market (and in other areas of Canada) anticipated a softening of OSFI’s proposed changes. The rationale was that the housing market in this red-hot real estate market was already slowing and correcting and stricter mortgage regulations would only exasperate the situation.
Expect mortgage rates to rise, now
While those in the Toronto housing market fear a potential correction or crash as a result of OSFI’s new residential mortgage rules, the rest of Canada should also brace for the anticipated fall-out. The biggest change will be an uptick in residential mortgage rates, even without a change in bond rates (that impact fixed rate mortgages) or the Bank of Canada’s overnight rate (which impacts variable rate mortgages). That’s because these new mortgage regulations will introduce additional costs to lenders, who will then pass down these costs to borrowers.