Canada's banking regulator has once again updated its "B20" guidelines for residential mortgage underwriting, this time to include a financial stress test for buyers who don't need CMHC-mortgage insurance. OSFI (the Office of the Superintendent of Financial Institutions) said today that the changes will come into force the first day of January 2018 and will "reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada."
Let's take a close look at the changes...
Under the current (2016-2017) rule book, homebuyers who have 20% or more down payment can qualify for a larger mortgage than a homebuyer with less than 20% down, even if they have the same household income, same debt load, and same credit rating. Under the new (2018) rules, all borrowers will be treated the same regardless of down payment size. The intent of the enhanced "stress test" appears to force some financial slack into all borrowers' ability to meet their monthly payment obligations even if mortgage interest rates rise in the future. The Government of Canada message to all debt consumers seems to be - if you want to take on large amounts of consumer debt, whether via credit cards, lines of credit, vehicle loans, etc.,, that something has to give, and that will be the size of home mortgage for which you can qualify. Yes, it will reduce access to mortgages for some home buyers. Some will not be able to enter the housing markets in the neighborhoods, towns or cities where they want to live, or alternately will reduce the price home buyers are able to offer.
Another change announced by OSFI include restrictions on bundled mortgages, which are (were) a way for certain financial institutions to circumvent the 2016-2017 rules and lend more.
Finally, OSFI now requires each federally-regulated lender to formally establish a Residential Mortgage Underwriting (Risk) Policy, which - by my understanding - would require a lender to define the maximum exposure the bank (hence it's shareholders) is willing to have to specific market segments, to formally measure and regularly report on those exposures, and to actively adjust available lending in those areas such that they adhere to their internal policies. This mechanism should have the effect to allow a lender to lend more in certain (low-risk) segments and to lend less in other (higher-risk) segments as housing markets and the economic environment evolve.
On this last one (and IMO), I think that OSFI is saying to the banks and lenders, you better understand and manage the risks in your portfolios to board-approved limits. If the bank wants to swing for the fence (lending in Toronto as an example), so be it, but it will be their Board of Directors who roast if something goes wrong, not a bunch of finger-pointing at the worker-level! Personally, I see this last change as a stronger reason to consider using a mortgage broker - our job is to know the various lender policies, regional risk tolerance, and certainly some lenders are going to be easier to deal with than other others as these new rules take effect and the lending market becomes more stratified.
If you have questions on how the new rules might impact you, please feel free to contact us.