The new rules put in place by the Office of the Superintendent 
of Financial Institutions (OSFI) came into effect on January 1, 2018. Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures applies to all federally regulated financial institutions. It outlines the rules and criteria a lender must consider prior to approving a loan.
Below we provide a snapshot of how the rules will affect you in various borrowing situations.
Buying a home with 20% down payment or more
Guideline B-20 states that the minimum qualifying rate for uninsured mortgages has to be the greater of the 5-year benchmark rate, or the contractual mortgage rate + 2%. This “stress test” allows a lender to ensure that a borrower’s housing expenses compared to their income remain below a certain threshold – even if the rates rise.
This will have the effect of more buyers settling for less expensive homes or waiting until they have saved up for a larger down payment.
If you have signed a purchase agreement on a new home prior to January 1, 2018, lenders will not have to apply the stress test, even if you apply for a mortgage this year. If you have been pre-approved for a mortgage, some lenders may give you 120 days after January 1, 2018 to buy your new home without having to undergo the stress test.
Renewing your mortgage
The stress test will not be applied to borrowers renewing an existing mortgage. However, if borrowers are shopping around for a better rate, the competing financial institution will need to qualify the application within the new rules.
If you had a mortgage refinance commitment in place prior to December 31, 2017, you will have 120 days to act on this commitment without being subjected to the stress test.
Refinancing your mortgage
A borrower will have to qualify for a refinance of their mortgage according to the stress test, meaning that you might have to settle for a smaller loan.
Another option that borrowers might explore are credit unions. As noted above, Guideline B-20 only applies to federally-regulated financial institutions. This means that you may continue to borrow, without a stress test, from a provincially-regulated credit union. It is important to keep in mind that most credit unions adopt federal guidelines on a voluntary basis. However, this would mean that they would be able to make some exceptions that federally-regulated financial institutions are unable to make.
Guideline B-20 might seem daunting, however, it should be seen as a method of protection against personal debt. These new rules were put forth in an effort to protect borrowers in the current housing environment where we have seen an upward trend in housing prices, leaving some unable to make payments, should the mortgage rates rise.
It should be noted that the stress test only applies to conventional mortgages putting 20% or more down on their mortgage. As such, this will only apply to a certain segment of homebuyers. Borrowers that put down less than 20%, mainly first-time home buyers, will not be affected by the stress test. These borrowers qualify for Insured Mortgages. The qualifying rate for Insured Mortgages will remain at the 5-year posted rate.
It would benefit borrowers to discuss their options with a mortgage specialist who can advise the best course of action. This ensures that borrowers can confidently enter the housing market without risking their financial wellbeing.