New Canadian Mortgage Rules
Starting January 1st, 2018, Canadian mortgage rules change. This is a direct a response to poor lending practices in the U.S which put the world economy at risk. It motivated G-20 countries to introduce proper financial oversight to mortgage lending and B-20 is Canada’s answer to this initiative.
The Office of the Superintendent of Financial Institutions (OSFI) sets rules for federally regulated lenders as well as the Canadian Mortgage and Housing Corporation (CMHC). They updated the underwriting practices for residential mortgages with amendment B-20.
What New Canadian Mortgage Rules Mean for You?
B-20 and the new Canadian mortgage rules impose stricter guidelines for lenders dealing with uninsured mortgages. These include mortgage loans greater than 80% of the home value. Lenders will now engage in greater levels of due diligence with such risks. The OSFI requires them to manage their residential mortgage portfolio with stricter reporting.
Consequently, this could affect home buyers with less than 20% to put down as a deposit. Generally, first time home buyers fall in this category. B-20 now requires your lender to charge you a higher interest rate. It will be the highest of the five-year benchmark rate published by the Bank of Canada, or 200 basis points higher than your contractual mortgage.
For sure, there is much less wiggle room left for people wanting to purchase a home with less than 20% down. And your lender will now scrutinize your income much more closely to ensure you can service the rest of the debt.
This means you will need to have a strict budget for the maximum price you pay for your home. In hot markets like Toronto and Vancouver, you could be priced out of bidding wars without extra funds to meet the 20% down payment threshold or without a co-signer to your loan. If you are in the market for a vacation home, then your entire debt load will now be taken into consideration.
If your mortgage is up for renewal, then you do not need to pass this financial stress test as long as you remain with your existing lender. However, switching lenders puts you under the same rules as a new home buyer.
However, if your home has appreciated in value over the last several years and you have continued to pay your mortgage down, a good credit history might justify shopping around for competitive rates. You might even save money in the long run.
If your income situation or credit history has changed, then book a counselling session with us well in advance of your renewal date. We can offer you guidance on the steps to take to bring your credit scores back into shape.
The Silver Lining
There is a silver lining with these new Canadian mortgage rules. Your home is usually the biggest purchase you make. And often, it is also your largest debt. B-20 encourages you to enter into this purchase only under the best possible financial circumstances.
It incentivizes you to save at least 20% for the down payment. It penalizes you with higher interest rates to discourage you from making a purchase outside of your budget. First time home buyers may decide to continue renting for a little longer or wait for their income to go up before buying their first home.
Unintended Consequences of B-20
While B-20 was introduced to ensure lenders remain in the black to prevent a meltdown of the financial markets, an unintended consequence of these revisions remain those individuals who actually will take the risk and plunge into this purchase with less than 20% down. In order to qualify for financing, they might consider volatile short term variable rate financing as an option.
With the job market also leaning toward short term, temporary and contract work, this is a deadly situation. A sudden reduction in income or hike in interest rates could quickly leave such risk takers in a no-win situation. This is precisely how credit card debt spirals out of control and long term debt problems begin.
Another risk are credit unions. They are conspicuously absent from the list of lenders subject to OSFI’s rules. Some applicants may just seek out loans from these unregulated lenders, once again, exposing themselves to higher debt loads and interest rates along with the greater risk of default.
How to Work with the New Canadian Mortgage Rules?
If you are a first time home buyer, then our advice to you is surprisingly simple: Understand the rules as they apply specifically to your finances. Do your homework and properly plan your budget, first. Our Credit Counsellors can help you with these calculations.
Next, get obtain a pre-approved mortgage from your bank so there are no surprises. Give yourself plenty of time with this purchase and most important of all, remain within your budget. .
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