If you are a first time home owner and looking to secure a mortgage, be wary of January 1, 2018. As per the Office of the Superintendent of Financial Institutions, OSFI is reinforcing a strong and prudent regulatory regime for residential mortgage underwriting. The purpose of these regulations is to make sure the mortgage lenders are vigilant in their mortgage underwriting practices which makes it harder to secure an uninsured mortgage. As per the OFSI:
The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.
What’s new with the new mortgage rules?
A new stress test as it is popularly called is being introduced. This stress test basically is a new minimum qualifying rate for uninsured mortgages. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.
Full and complete loan documentation is now required which should include the borrowers following info:
- A description of the purpose of the loan;
- Employment status and verification of income (see Principle 3);
- Debt service ratio calculations, including verification documentation for key inputs (e.g., heating, taxes, and other debt obligations);
- LTV ratio, property valuation and appraisal documentation (see Principle 4);
- Credit bureau reports and any other credit enquiries;
- Documentation verifying the source of the down payment;
- Purchase and sale agreements and other collateral supporting documents;
- An explanation of any mitigating criteria or other elements (e.g., “soft” information) for higher credit risk factors;
- Property insurance agreements.
- A clearly stated rationale for the decision (including exceptions); and
- A record from the mortgage insurer validating commitment to insure the mortgage, where applicable.
One of the most important aspects is verification of Income. We all know that most home buyers do not qualify for home price and therefore some tends to reach out to private lenders to secure loans. The new rules states that:
FRFIs should demonstrate rigour in the verification of a borrower’s income, as income is a key factor in the assessment of the capacity to repay a mortgage loan, and verification of income helps detect and deter fraud or misrepresentation. This includes substantiation of a borrower’s:
- Employment status; and
- Income history.
In regard to loan documentation that supports income verification, FRFIs should undertake rigorous efforts to confirm that:
- The income amount is verified by an independent source;
- The verification source is difficult to falsify;
- The verification source directly addresses the amount of the declared income; and
- The income verification information/documentation does not contradict other information provided by the borrower in the underwriting process.
In simple language, new rules is a requirement to stress test uninsured borrowers. Earlier, only insured borrowers had to undergo such a test. This means that under the new stress test, if you are a potential buyer of a $1 million home with 20 percent down, your purchasing power is reduced to by about 15 %.
Real Time Scenerio:
Before Jan, 2018 if you could afford a home worth $8,00,000 on a 5 year fixed mortgage by putting down of 20% at standard mortgage rate, after Jan 1, 2018 your purchasing power is knocked down to around 6,25,000. These are just estimated numbers for reference.
Ramifications of new mortgage rules:
The new rules coming in 2018 is obviously a bad news for vulnerable borrowers and is seen as a measure for a further correction in the booming real estate market in the Toronto area and the rest of Canada. This rule will in fact bring down the home prices especially in the Toronto, Mississauga, and Brampton real estate market.
Read our post about : A guide to first time home buyers