Tighter rules coming

Last week, The Office of the Superintendent of Financial Institutions (OSFI) proposed a further tightening of mortgage underwriting guidelines for all lenders that are federally regulated.

The announcement came almost exactly one year after OSFI said it would review its B-20 guidelines and further scrutinize underwriting standards.

The most significant change will be a stress test for all uninsured mortgages — any mortgage where there is more than 20 per cent equity in the property.

Currently, only insured mortgages (less than 20 per cent equity), variable rate mortgages,

Home Equity Lines of Credit and fixed term mortgages with terms less than five years are qualified at a higher rate.

That rate is the Bank of Canada’s qualifying rate which has recently been increased to 4.84 per cent. The new guidelines will be replaced by a qualifying rate that is 200 basis points or two per cent above the contract interest rate of the mortgage.

In October 2016, new stress test requirements were suddenly implemented for insured mortgages but now the new proposal will apply the stress test to all mortgages in an effort to cool the hot housing markets in Canada.

Why is it important for you to be aware of these changes? Because they are going to affect you. In a nutshell, you will qualify for 25 per cent less of a mortgage than you did prior to the changes.

This will potentially reduce your purchasing power when it comes to buying a home.

With the proposed changes the following information may not matter when it comes to qualifying for a mortgage.

• That you have excellent credit
• Or a large down payment
• A long established relationship with your current financial institution
• Excellent net worth – savings, investments, equity in other real estate

The new guidelines will require lenders to only look at the net income on your tax return — Line 150 — and the source of that income for qualifying purposes.

Other proposed changes include:

• loan-to-value (LTV) measurements will be adjusted for local market conditions and risks
• the prohibition of co-lending arrangements that are "designed, or appear to be designed to circumvent regulatory requirements such as bundled first and second mortgages programs

OSFI has said that its proposed changes will be available for public input until August 17, 2017 and the updated B-20 guidelines for mortgage underwriting will be issued in the fall and come into effect shortly after.

Bottom-line: Very soon, it’s going to become much more complicated than it already is to qualify for a mortgage.

If you need assistance in navigating this very complicated mortgage world please give me a call.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.