The B-20 guidelines define things such as the minimum requirements borrowers must meet to receive a loan from these institutions, how these institutions measure the ability of borrowers to pay back their loans, and to an extent the rates and terms that these institutions can offer.
The full name of the B-20 is Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures. It’s published and enforced by the Office of the Superintendent of Financial Institutions (OSFI) and underwrites the rules and practices that all federally regulated institutions must adhere to.
These rules define things such as the minimum requirements borrowers must meet to receive a loan from these institutions, how these institutions measure the ability of borrowers to pay back their loans, and to an extent the rates and terms that these institutions can offer.
Why am I hearing so much about it now?
The B-20 guidelines have recently been changed by the OSFI to further tighten underwriting standards for mortgages at federally regulated institutions. In effect, this will make it harder for many people to secure a mortgage from these institutions.
The final draft of the guidelines have been made public on October 17, 2017, and will come into effect on January 1, 2017. You can find the release statement as well as the final draft on the OSFI’s website.
Why is the OSFI tightening regulations?
The OSFI raised the following concerns as the reason for updating these guidelines:
- Loans uninsured by the CMHC is growing by 14% every year.
- ∓ 50% of the Big 6 Banks in Canada’s loans are now uninsured.
- Almost 80% loans in Toronto and Vancouver with its high-value housing market are low-ratio mortgages (more than 20% down payment).
- Around 50% of these loans are near (or on) this L-T-V limit.
- By now, most of these low-ration loans have 30-year amortization periods.
- Mortgages that have a 450% loan-to-income ratio of their borrowers have grown in two years from 19% to 27%.
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What does this mean for the average borrower?
The uninsured stress test
If you have an uninsured mortgage, you will now need to prove your ability to overcome risk by meeting the requirements for a loan with a 2% higher interest rate than what you will actually be applying for. This alone will make it difficult for many to qualify for a loan in the first place.
Loan to value ratios is a lending risk assessment ratios that lenders use to determine the quality and risk of a specific loan. To do this, you compare the total amount of the loan or mortgage with the appraised value of the home or property. The more value the home has over the mortgage the better. Borrowers will be held to stricter and tighter LTV requirements with less leeway.
Lower housing demand
There is very little doubt that the extra difficulty present in securing a loan will have an effect on the demand for housing. This might cause prices to either go down which will be good news for prospective buyers but bad news for property owners.
Lower purchasing power
With the new stress test, many estimates that it could slash new purchasing power for uninsured borrowers who put down a 20% down payment by up to 15%.
Higher demand for private mortgage lending
There is no doubt that the new regulations do slightly level the playing field between federally regulated financial institutions and private lenders. Interest rates at these traditional financial institutions are bound to go up and combined with stricter requirements, private lenders will become the only option for many new borrowers.