Recently, OSFI confirmed that their draft proposals for residential mortgage underwriting practices through revisions to Guideline B-20 are to become reality in January 1, 2018. The changes are threefold and impact the mortgage market by; Setting a higher qualifying rate for stress testing of all uninsured mortgages; Requiring that Loan-to-Value (LTV) measurements remain dynamic and adjust for local market conditions where they are used as a risk control, such as for qualifying borrowers; Placing a restriction on co-lending arrangements that are designed, or appear to be designed to circumvent regulatory requirements.
The regulation change that is getting most of the attention and news headlines is the tightening of stress testing rules which now fall in line with the tests for the insured mortgage market.
What does it mean?
The change in rule means that residential mortgage borrowers with a deposit of more than 20% and who go to federally regulated lenders will soon be required to pass a stress test at a significantly higher rate than they were required to before. The rate at which uninsured borrowers will need to pass the stress test will be the higher of the contractual mortgage rates plus 2% or the 5-year benchmark rate published by the Bank of Canada. The rule will not apply to mortgages taken out between now and January 1, 2018 or existing mortgages that are rolled over at the same institution. They will apply to if borrowers switch their lender.
Crunching the numbers
RBC Economics have crunched the numbers and it makes for grim reading. They work out that to be able to buy the same average home in Canada (slightly over $500,000) after the change, a buyer will be required to have a minimum income that is $16,000, or 18%, higher than is currently needed. The calculations are based on the increase from the current five-year rate (3.49%) to a rate that’s 2 percentage points higher.
Who will this impact?
Canada’s largest banks recently estimated that approximately 10% of mortgage originations will be negatively impacted by this change and it has the potential to impact the wider market given roughly 45% of domestic banks’ mortgage portfolios and more than 70% of originations are non-insured.
One fear hitting the headlines today is that the impacted borrowers will turn to unregulated lenders which are not subject to the new rules including credit unions and caisses populaires.
RBC Economics view that this migration could be material and OSFI superintendent Jeremy Rudin acknowledged this yesterday when speaking to reporters by stating, “”That would not be an intended consequence, nor would it be a completely unanticipated consequence”.