By Chelsea Taylor, CIRP, LIT
The ball has dropped and 2018 is upon us, along with the The Office of the Superintendent of Financial Institutions Canada’s revised Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures.
Here is a quick overview of the new rules:
- The guideline applies to all federally regulated financial institutions (Institutions).
- All residential purchasers will be put to a stress test and must now meet the minimum qualifying rate to be approved for a mortgage.
- The minimum qualifying rate will be the greater of the five-year benchmark rate published by the Bank of Canada (currently 4.99%) or the approved mortgage rate plus 2%. This means that the purchaser may need to qualify at an interest rate higher than 4.99% in some circumstances.
- Loan-to-value (LTV) ratio limits must be established and adhered to by Institutions. These ratio limits must also be reflective of risk and updated with changing housing markets.
- Restrictions will be placed and certain lending arrangements that are designed, or appear designed to circumvent LTV limits established by the Institutions.
- Mortgage renewals with your current Institution are exempt from the stress test.
Pre-2018, homebuyers putting 20% or more down on their residential purchase could avoid the stress test and generally qualified for a higher mortgage as a result. Although 2018 has just begun, these new mortgage rules have already started to impact buyers by reducing their buying power by 20% in some circumstances. That means that purchasers will either need to lower their home buying budgets or save more money to use as a down payment. It has yet to be seen whether these new rules will affect the cost of housing in Canada, especially in urban centres where the cost of a home is almost out of reach for most buyers.
While these new rules may seem harsh, they were put in place with good intentions. With rising home prices and consumer debt loads, many home owners are in a tough place financially. The concern is that when current mortgage terms are renewed, an increase in interest rates could be the tipping point and some homeowners may find themselves in situations where they are no longer able to service their mortgage, living expenses and existing debt load. These lending changes will also make refinancing more difficult for those who intended to use home equity to assist in paying-off consumer debt.
If you were planning to purchase a home in 2018, or looking to refinance to consolidate debt, now may be the right time to discuss your options with a mortgage broker or a
Licensed Insolvency Trustee (LIT).
You can find a LIT near you by visiting CAIRP’s website:
http://www.cairp.ca/find-a-cirp.
