It’s Official, Canadian Real Estate Buyers To Face OSFI’s Tighter Mortgage Regulations (B-20)

It’s Official, Canadian Real Estate Buyers To Face OSFI’s Tighter Mortgage Regulations (B-20)

Canadian real estate buyers will face tighter mortgage regulations. The Office of the Superintendent of Financial Institutions (OSFI) has published a finalized draft of the B-20 Guidelines. The guidelines go into effect January 1, 2018, and would see regulated financial institutions adopt more strict lending procedures for uninsured mortgages. Here’s the biggest changes consumers will face.

Higher Minimum Qualifying Rate

The new guideline will see uninsured mortgages qualify at a higher rate, a.k.a. you will be stress tested. New rules will see new borrowers qualify at the five-year benchmark rate published by the Bank of Canada (BoC), or the contract rate – whichever is greater. Then they add another 2% on top of that. So that sweet five-year at 2.89% that you found, will be treated like 4.89% when determining how much you can borrow. We already covered how this would impact most markets – which is minimal. Most of the country isn’t maxing out their borrowing room, the exceptions here are Toronto and Vancouver.

“Enhanced” LTV Ratio Limits

All regulated financial institutions must establish loan-to-value (LTV) measurements and limits. This one is a little ambiguous, but each bank must conduct better assessments of the LTV of properties. As well as periodically update these numbers, even if you’re paying your mortgage just fine. In theory, this sounds pretty harsh. In reality, it’s not as bad as it seems. That is, unless home prices make an unlikely fall of more than 20%.

Restrictions on Non-Conventional Lending Arrangements

Regulated financial institutions are no longer allowed to circumvent LTV limits. Some companies have been packaging loans, and other “lending products” that help get around a few LTV issues, including the 20% down payment rule. It’s been a grey area whether they were allowed to do this, but now there’s clear guidelines to reject these kinds of deals. Creative mortgage specialists are going to have to go back to the drawing board.

Overall, prepare for a tighter lending environment. It’ll be interesting to see if this is enough to cool buyer expectations, or if this will lead to the further rise of private lenders. Oh yeah, private lenders aren’t subject to any of this.

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  • brent 7 years ago

    Do they still have the provision where a borrower doesn’t have to pass the stress test if they stay with the same lender?

    • Neo 7 years ago

      I don’t think so. Even when you refinancing you still have to pass the stress test.

      • bluetheimpala 7 years ago

        OSFI draft indicated the stress test would be at the discretion of the lender if it is a refinancing. Bad news for Canadians unless there is further regulation to keep the big 5 honest and maintain some form of competitive lending. Definitely want to know what made it in there!

    • Trevor 7 years ago

      “Expectations around new loan documentation and adjudication for mortgage loan renewals have not changed, and FRFIs are not expected to re-apply the qualification rate assessment to existing borrowers that are renewing mortgages.

      OSFI expects FRFIs will have a clearly defined risk-based approach for current and future mortgage renewals and will remain responsible for deciding what level of due diligence and review to place on borrowers’ qualifications at the time of renewal. FRFIs’ renewal practices should be articulated in internal policies governing their underwriting of residential mortgage loans. ”

      Its here:

      • brent 7 years ago

        thanks for that. By requiring FRFI’s to have a clearly defined risk-based approach, does this in any way put the Banks in a position of greater responsible for potential defaults? Could their risk based approach being selling collateralized debt elsewhere rather than lending at rates as if they held the loan entirely on their books?

    • Beh G. 7 years ago

      Renewing with the same lender, no. But refinancing or changing lenders, yes.

      • Darren 6 years ago

        One will be locked with the financial institution where mortgage exists and will be at the that institution’s mercy to re-finance or not. Since there will be no chance for most to pass the stress test with other banks, bank which holds current mortgage will be able to dictate the rate and terms it desires.

        Very unfortunate chain of events is happening, neither first time home buyers nor those who were putting aside 20 percent for their down payment will be able to afford anything other than a condo unit, which at this point is not a cheap solution either. Will be forced to rent and rents have gone up lately as well. This situation will bring a shortage of inventory to a real estate market as home owners would not want to sell lower than what their mortgage amounts are.

        The question is why all these rules within such a short time period? Is this a healthy solution for an overall state of economy at this point which lately was heavily dependent on a real estate market?

        • Ham 6 years ago

          If people can’t afford a place because of the stress test, they should not have bought the place in the first place. If their finances can’t accommodate for 2 percent rate increase, they are financially irresponsible and are taking on too much risk. I know people want a detached house and they feel they are entitled to have one. But if buying a house means that their financial stability is at the mercy of rising interest rate, they need to adjust their expectations and deal with living in a condo.

          It’s unfortunate that people are too stupid to stress test their own finances and the government has to step in this way. But left to their own devices, people will bring down the whole economy with their irresponsible borrowing.

  • bluetheimpala 7 years ago

    “It has begun!!!” – Shao Khan

  • Ray 7 years ago

    It’s noteworthy that this won’t apply to mortgages from private lenders. Will it apply to mortgages from some (or all) Credit Unions? I know they are provincially regulated, but if I recall correctly a credit union I dealt with (many years ago) was constrained by an arrangement it had with a bank.

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