OSFI New Mortgage Rules

2017-10-30 | 13:11:16

On Tuesday, October 17, 2017 the Office of the Superintendent of Financial Institutions Canada (OSFI)publishedthe final version of its Guideline B-20. The revised Guideline, which takes effect on January 1, 2018, applies to all federally regulated financial institutions.

Understanding OSFI New Mortgage Rules

By law, home buyers with a down payment of under 20 percent must purchase mortgage default insurance. Insurance premiums can easily be into the thousands of dollars, on top of the cost of a home, depending on the size of the down payment and the price of the property.

There are three mortgage insurers in Canada: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty. On a $500,000 home with a $50,000 down payment, CMHC says a borrower would be charged an extra $13,950 to insure the $450,000 mortgage.  In addition to the requirement of mortgage insurance, purchasers with less than a 20 percent down payment have also been obligated to undergo a stress test of their finances since last year.

 Home buyers who put down more than 20 percent of the value of a home do not have to pay mortgage default insurance and are known as "uninsured" borrowers. Currently, these borrowers do not have to undergo a stress test to qualify for a mortgage, but they will when these new rules take effect on January 1, 2018.

The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today. It is designed to simulate a borrower's financial situation by assuming they would have to pay back the loan at a higher rate than the one they were able to negotiate. So under OSFI's new rules, borrowers would be stress tested at either the Bank of Canada five-year benchmark rate, or two per cent higher than their actual contract mortgage rate, whichever one is higher.

The regulator published a draft of its new rules over the summer, before consulting with stakeholders about any changes that need to be made. The regulator said it received more than 200 submissions from people in the industry and members of the public about the rules as they were proposed in July.

Critics, including many in the real estate industry, said imposing a stress test on all buyers would put a chill on the housing market at a time that it can ill afford it. But OSFI is pressing ahead anyway with changes it describes as "vigilant."

WHAT THIS MEANS IN A NUTSHELL