The Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of its Guideline B-20. The revised Guideline, which takes effect January 1, 2018, applies to all federally regulated financial institutions.
We are pleased that OFSI 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.
We are however disappointed with the decision to implement a new stress test at a 200 basis points level. We expect this will encourage more people to take shorter term mortgages, putting more borrowers at risk should interest rates rise dramatically. We believe the new qualifying rate will have negative implications for the Canadian mortgage finance market and the national economy as a whole. Following this announcement, we will continue our discussions with the Ministry of Finance and the Bank of Canada (BoC) about the methodology used to set the five-year benchmark.
OFSI will be holding information seminars later this fall to discuss implementation expectations. A summary of industry concerns and OFSI's response to them can be
found here.
Overview of Changes Effective January 1, 2018
A new minimum qualifying rate (stress test) for uninsured mortgages will be set.
The minimum qualifying rate for uninsured mortgages will be the greater of the five-year benchmark rate published by the BoC or the contractual mortgage rate of +2%.
Lenders will be required to enhance their LTV measurement and limits to ensure risk responsiveness.
Federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve.
Restrictions will be placed on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.
A federally regulated financial institution is prohibited from arranging with another lender: a mortgage, or combination of a mortgage and other lending products, in any form that circumvents the institutions maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by the law.
As always we will continue to advocate on your behalf and keep you updated on the latest developments as they are announced.