OSFI Unveils New Stress Test
Canada’s banking regulator today unveiled the final changes to
its mortgage underwriting standards—Guideline B-20—that will further
tighten lending standards and affect borrowers and lenders alike.
most wide-reaching change announced by the Office of the Superintendent
of Financial Institutions (OSFI) is the establishment of a new minimum
qualifying rate, or “stress test,” for borrowers making a down payment
of more than 20% of the home’s value. Previously, stress test
requirements only applied to insured mortgages (those with down payments
of less than 20%) and most variable mortgages and terms less than five
The stress test requirement, which comes into effect on January 1, 2018, goes a step further than what was originally proposed by OSFI in July. Buyers with uninsured mortgages will need to prove that they can afford payments based on the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89%) or their contract mortgage rate plus two percentage points.
revisions to Guideline B-20 reinforce a strong and prudent regulatory
regime for residential mortgage underwriting in Canada,” Superintendent
Jeremy Rudin said in a press release.
in the month Rudin hinted that significant changes were coming in order
to address risks the regulator sees as a result of high household debt,
and high real estate prices coupled with historically low interest
“We are not waiting to see those risks crystallize in rising arrears and defaults,” he said in his October 3 speech.
The additional changes, which are directed at federally regulated lenders, stipulate that:
will be required to enhance their loan-to-value measurement and adhere
to appropriate LTV ratio limits “that are reflective of risk and are
updated as housing markets and the economic environment evolve.”
institutions will be prohibited from arranging a mortgage, or
combination of a mortgage and other lending products, with another
lender where the intent is to circumvent LTV ratio limits. But brokers
can still do it, so long as the borrower qualifies for both mortgages
(i.e., their debt ratios meet both the first mortgage lender’s and
second mortgage lender’s guidelines).
Concerns that the changes go too far
stakeholders expressed concerns that the more stringent stress test
could slow down the housing market more than anticipated.
announcement elicited an array of industry responses. CMT contributor
and intelliMortgage.com founder Robert McLister commented that OSFI
“hasn’t just ‘tapped the brakes,’ it’s jumped on the brakes with both
Paul Taylor, President and CEO of Mortgage Professionals Canada, was encouraged by at least one concession that OSFI had made.
was pleased that OSFI agreed with our recommendation not to create a
prohibition on all co-lending activities and instead clarified that the
restrictions only apply to arrangements that are designed to circumvent
existing laws or policies,” Taylor said.
am, however, disappointed with the decision to implement a new stress
test at whichever is greater of 200 basis points above the contract rate
or the benchmark rate. I believe the new qualifying rate will
have negative implications for the Canadian mortgage finance market and
the national economy as a whole.”
rate comparison website RateHub.ca published a scenario looking at the
impact of the stress test rule on a family earning $100,000 putting down
a 20% down payment on a 3.09% five-year fixed rate amortized over 25
year. Under the current rules, that family could qualify for a house
worth $706,692, but after the new rules take effect in 2018, that family
would only qualify for a house worth $559,896 based on a 4.89% stress
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