CHANGES TO MORTGAGE UNDERWRITING GUIDELINES

October 17, 2017

Data Release: OSFI extends ‘stress test’ to all new mortgages

• The Office of the Superintendent of Financial Institutions (OSFI) released revised “B-20” guidelines for residential mortgage underwriting at federally regulated financial institutions. As was widely expected, the updated ‘stress test’ will be applied to all new mortgages beginning in January 1, 2018. Currently the test applies only to mortgages requiring insurance (i.e. those with low down payments) and those whose term is less than five years.
• This change requires that borrowers qualify for mortgages at the greater of the Bank of Canada’s five-year benchmark rate or the contracted rate plus 200 basis points. For reference, as of this morning, the Bank of Canada posted rate was 4.89%. It should be noted that OSFI will not apply the more stringent requirements in the case of mortgage renewal.
• While the extension of qualification guidelines will likely draw the most attention, OSFI introduced two other changes:
• Loan-to-value limits must be established and lenders will be required to ensure that they “are reflective of risk and are updated as housing markets and the economic environment evolve”
• Lending arrangements designed to get around loan-to-value limits are restricted with the updated guideline explicitly forbidding ‘co-lending’ or ‘bundling’ arrangements.

Key Implications

As expected, OSFI has expanded the scope of the ‘stress test’ to include anyone taking out a mortgage at a federally regulated institution regardless of term and whether they are insured. Perhaps underscoring the logic behind the change, OSFI bank data for August of this year showed insured mortgages (which were already subject to the stress test) were down 4.5% year-on-year, while uninsured mortgage credit grew 17.3%. While this is partly related to the rising prices of Canadian real estate, with more and more of it priced above the insurance caps, it also likely reflects the skew stemming from the past stress test requirements. As such, today’s change, alongside the explicit guidance around co-lending arrangements, will together help address the shift as far as those borrowing from federally regulated institutions.

As discussed in our regional housing outlook, broadening the stress test will likely further slow housing activity, depressing demand by 5% to 10% once implemented, with some pull-forward of activity likely to take place ahead of the January 1st implementation date. Price growth will also be impacted, with these changes expected to exert a drag of between 2% and 4% over 2018. On balance, these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment.

Source: TD Economics

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