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The Office of the Superintendent of Financial Institutions (OSFI) released new guidelines for the mortgage industry on October 17, 2017. “These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.

Guideline B-20 is effective January 1, 2018.

The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.

Guideline B-20 now requires 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%.

In Canada, borrowers that purchase a home with a down payment less than 20% of the purchase price have to purchase mortgage insurance to protect the lender (ex. CMHC). Now, even uninsured borrowers have to pass this new stress test. The stress test is meant to ensure that borrowers will be able to pay their loan if interest rates should increase in the future.

What does this mean for home buyers? Consider this calculation by Moneysense:

A family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.

Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)

Applications in the new year:

The OSFI states that if you get a mortgage from a federally regulated lender such as a bank, then all “loan applications or pre-approvals occurring after January 1, 2018, will be subject to the new rules.” There are no exceptions, even if you signed your purchase agreement before the new rules were announced.

Higher debt-ratio borrowers will still be able to find lenders to approve them, even after Jan. 1. That’s because most provincially regulated lenders are not bound by the OSFI’s new rules.

But beware the cost. Lenders aren’t dumb. If they know you’re a more heavily indebted borrower who can’t qualify at a bank, they’re going to make you pay.

Please contact us if you have any questions about mortgages and the new stress test.