By Roger Taylor
It started on January 1 – new federal rules required of residential mortgage borrowers.
Mortgage seekers with a down payment of more than 20 per cent have been required to qualify at a significantly higher rate when they do business with a federally regulated mortgage lender.
The Office of the Superintendent of Financial Institution (OSFI) made revisions to “Guideline B-20” on residential mortgage underwriting and procedures in an effort, they said, to safeguard Canadian households and the financial system. In other words, make it a little more difficult for people to get a big mortgage to buy a home.
RBC senior economist Robert Hogue wrote that, under the revised guideline, federally regulated financial institutions must set the qualifying rate for non-insured mortgages at the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada.
That brought the qualifying rules for federally regulated, non-insured mortgages in line with insured mortgages. The higher qualifying rate represents a “stress test”.
It was predicted at the start of the year by the major banks that about 10 per cent of mortgage customers would be negatively affected by the change. And that has proven true. Recent data shows hot real estate markets like Toronto and Vancouver have cooled off.
Other revisions to the B-20 guideline include more stringent requirements for the measurement of loan-to-value ratios and more explicit restrictions on co-lending arrangements.
While the tougher mortgage rules have been applied by the banks, there has been a rumour that Credit Unions, because they are established under provincial rules, were slightly less strict about applying the new stress test on its mortgage customers.
Ken Shea, president and CEO of East Coast Credit Union, says the B 20 rules are applied to all mortgages insured by Canada Mortgage and Housing Corp. or by one of the other mortgage insurers. All follow exactly the same rules, whether the lender is federally regulated or not.
The only mortgages that are an exception are the ones where a person doesn’t need the mortgage insurance, so they’re under 80 per cent loan-to-value and if you’re going through the credit union. Only federally regulated financial institutions need to do the means test.
“With (credit unions) we tend to focus a little more on having a better relationship, so we tend to know our members better. We do look at their financial wellbeing as part of that process, so we try not to put anyone into a place where they’re going to have trouble, with rates going up,” said Shea.
“In the Atlantic Canadian provinces anyway, you’re not always hitting up against that rule because your folks, for the most part, have the wherewithal to afford their houses. There may be reasons why, as a financial institution, you may want to apply the stress test. For example, if the applicant is new in their job and beginning their career,” he said.
East Coast Credit Union has seen a modest change in demand for mortgages, “but I wouldn’t say we’re seeing people banging down the doors,” said Shea.
The mortgage business, because of the B-20 rules and the fact that rates are starting to rise has people looking at affordability. “We’re not seeing as much (mortgage) volume, I don’t think, as we were seeing a couple of years ago,” he said.
Shea believes the rule changes have had the desired effect in Toronto and Vancouver. The Halifax market tends to be a little bit steadier so the decline in the market has not been as great.
“If someone was looking to buy a couple of months ago, and they’re still looking to buy, it is a good time to get your rate locked in,” Shea recommended.
“Normally, most financial institutions have a lock-in period of either 90 days or 120 days. So, you can give yourself some time to shop,” he said
Shea said he doesn’t believe there will be a huge increase in interest rates this year. There’s economic uncertainty and that is causing the economy to slow, which probably means that any rate increase this year will be no more than a quarter to a half per cent.
Roger Taylor is business writer with The Chronicle Herald.