The Office of the Superintendent of Financial Institutions released its finalized B-20 Update to the mortgage industry, last week the news regarding the upcoming mortgage rule changes for conventional buyers, to put the brakes on borrowing and ensure we will be able to handle a rising rate environment.
Don’t panic, there is always a solution but it is key to ensure we are educated when making our next steps and decisions within the market and regarding our mortgage financing.
The government released three major changes to the qualifications as follows:
A new minimum qualifying rate often referred to as the “stress test rate” for uninsured mortgages (mortgages where clients are putting 20% or more down).
- B-20 now requires mortgage clients to qualify on a minimum rate based on the greater of the 5 Year Bank of Canada Rate (also known as the benchmark) or the contract rate (rate for your mortgage) plus 2%.
Lenders are now required to enhance their LTV measurement and limits so they will be dynamic/fluid and responsive to risk.
- This means lenders must establish and adhere to appropriate LTV ratio limits that are reflective of risk and can be updated as housing markets and the economic environment evolve.
OSFI is placing new restrictions on lending arrangements that appear designed to circumvent LTV limits. ie Mortgage Bundling (1st Mortgage with Bank + Private Mortgage in 2nd Position)
- Lenders are prohibited from arranging mortgages with other lenders, including the combination of a mortgage and other lending products in any form that exceeds the institution’s maximum LTV ratio. This applies to limits in its residential mortgage underwriting policy and any requirements established by law.
Who will this effect:
- People looking to purchase with a down payment of 20% or greater, who are at their maximum debt servicing for qualification purposes.
- People looking to refinance their homes through an equity take out or secondary mortgages.
- People who are currently looking to obtain equity financing on their purchase with a down payment of 30% or greater, who have been qualified based on their Loan to Value versus Income.
These changes will be enforced for all federally regulated lenders but are expected to become applicable for any lenders that are also using funds from federally regulated lenders to fund mortgage products within their own mortgage portfolios i.e. (the big banks & non-bank lenders). The Credit Unions are provincially regulated, so the next few weeks/months will determine whether they decide to follow suit or are required through further reform to follow the same requirements.
What it will look like…
The maximum Gross Debt Servicing (Amount of your Gross Income which can be utilized towards your Home Expenses) is 39% of your combined household gross income.
Example New Rules in Practice:
Income Combined $100,000.00 (Couple looking to buy a Townhouse with 20% Down Payment)
Current Pre-Approval: (On a 5 Year fixed term & 30 year amortization)
Purchase Price: $775,000.00 & a Down Payment of $155,000.00, Mortgage of $620,000.00
- 20% Down Payment (Own Resources or Gift)
- 30 Year Amortization
- Fixed Rate Mortgage with a 5 Year Term of 3.39%
- Mortgage Payment: $2738.01
- Qualifying Payment: $2738.01
- Plus Expenses (Tax, Heat & Strata Est*): $458.00
- Income Monthly: $8,333.33
- Qualifying Payment + Expenses: $3,196.01
- Qualifying Payment + Expenses/ Income Monthly: $3,196.01/8333.33
- Gross Debt Servicing = 38%
New Pre-Approval (Under New Rules, qualifying based on higher of the BOC 5 Year Benchmark or their rate plus 2% currently 4.89% vs. 5.39% (using 5.39%)):
Purchase Price: $625,000.00 & a Down Payment of $125,000.00, Mortgage of $500,000.00
- 20% Down Payment
- 30 Year Amortization
- Fixed Rate Mortgage with a 5 Year Term of 3.29%
- Mortgage Payment: $2,208.07
- Qualifying Payment: $2,785.99
- Plus Expenses (Tax, Heat & Strata Est*): $458.00
- Income Monthly: $8,333.33
- Qualifying Payment + Expenses: $3,243.99
- Qualifying Payment + Expenses/ Income Monthly: $3,243.99/8333.33
- Gross Debt Servicing = 39%
Reducing your borrowing power by between 20-25% based on your individual qualifications.* Subject to financial institution implementation of the above rule changes, and specific lender guidelines, to be determined over the coming weeks.*
What next? Speak to your Mortgage Professional to determine the effect that these changes will have on your individual situation. If you need to refinance, are looking to purchase a new home or plan on restructuring your existing mortgage holdings, now is the time to reach out.
With change, always comes opportunity although this will greatly affect peoples borrowing potential, it is also protecting us for the future rate increases giving individuals piece of mind. In a rising rate environment, it will allow us as a nation to ensure we will be able to support the increased payments.
Now is the time to speak to a professional, assess your options & determine the best direction for you and your financial plan moving forward.
