A new round of mortgage regulations has been introduced to the Canadian Housing Market, but don’t panic - this set is much less likely to impact your ability to buy a home.
The Office of the Superintendent of Financial Institutions (OSFI) revealed the proposed regulations today for public review. They’ll remain open for comment until May 23, when a final version will be drafted and implemented. Dubbed B21, the changes target providers of mortgage default insurance, which is required by all buyers paying less than 20% down on their home purchase.
The purpose of the regulations is to create consistency between mortgage insurers’ underwriting practices and create greater disclosure and transparency.
These changes are a follow up to the B20 regulations introduced last summer, the fourth in a series of changes designed to discourage risky borrowing and too-high debt ratios. Those restrictions capped amortizations at 25 years, changed TDS and GDS ratios, and limited LTVs for refinances and HELOCs.
This round is anticipated to have a much less severe impact on the consumer, affecting instead the institutions (CMHC, Genworth and Canada Guaranty) that dole out insurance on high-ratio financing.
“With Guidelines B-20 and B-21, once finalized, OSFI is making clear its expectations for both lenders and insurers operating in the housing market. The industry’s adherence to these principles will contribute to the continued stability of the market,” said Superintendent Julie Dickson in OSFI’s press release.
If you fit into the traditional home buyer mould (employed, decent credit score, fit the debt-to-income ratio risk threshold) - not much will change. While the regulations mean insurers must more deeply scrutinize mortgage borrowers' qualifications, much of the criteria has already been implemented at the federal level by FI’s from the B20 rollout last summer.
Here are specifications for borrower requirements on the B21 proposal:
Down payments: The rules state insurers must implement a minimum down payment (which already exists at 5%, established in 2008). As well, the source of the down payment calls for greater scrutiny. Buyers can still get away with borrowing their down payments, but rolling any cash back from the sign up incentives into a down payment is no longer kosher.
Eligibility: Insurers must carefully determine a buyer’s eligibility, assessing foreign investors, high-risk borrowers and non-Canadian residents.
Credit History: Methods must be established by the insurer for confirming a borrower’s credit background and employment status. A process must be outlined for vetting self-employed buyers as well.
Debt Coverage Services : Consistent formulas must exist for calculating GDS and TDS ratios for mortgage qualification.
Because the new regulations are to create consistency among mortgage insurers and tighten underwriting processes, there will be less room for underwriting “exceptions”. These refer to borrowers who may not qualify based on an insurer’s risk parameters, but compensate in some other way - for example, a self-employed borrower may come up short when proving their income consistency, but this can be forgiven should they make a bigger down payment or have a very high credit score.
In fact, these compensations are often relied upon by self-employed buyers, who don’t have the required employment history, tax records, or stability vouched for by a company or institution. It may prove tougher for these individuals to qualify for a mortgage under the tightened underwriting rules.
Seeing as much as 20% of Canada’s population is self-employed, it could prove interesting to see if the matter will be identified and contested as the public reviews the proposed changes prior to the May deadline.