New Qualifying Rates for Insured and Uninsured Mortgages

In today’s real estate markets, nothing comes as a surprise. There has been speculation for months that Canadian officials may try to cool the nation’s booming housing market. On cue, they moved ahead with tighter mortgage qualification rules after the central bank issued a fresh warning against buyers taking on too much debt.

Uninsured Mortgages

On May 20, the Office of the Superintendent of Financial Institutions (OSFI) announced it will move forward with a proposed new qualifying rate for uninsured mortgages, reinforcing the mortgage underwriting principles outlined in Guideline B-20. As of June 1, 2021, the qualifying rate for all uninsured mortgages should be the greater of the mortgage contractual rate plus 2%, or 5.25%. The change raises the minimum qualifying rate by 46 basis points from the current 4.79%.

Insured Mortgages

Deputy Prime Minister and Minister of Finance Chrystia Freeland, then announced the federal government will align with OSFI by establishing a new minimum qualifying rate at the same level for insured mortgages.

Chrystia Freeland issued the following statement:

“Maintaining the health and stability of Canada’s housing market is essential to protecting middle class families and to Canada’s broader economic recovery. This week alone I have spoken with a number of municipal leaders and some of Canada’s leading private sector economists about rising housing prices, the issue of housing supply, and maintaining affordability for the middle class, including for young families and new Canadians.

“With today’s official confirmation from OSFI of the new minimum qualifying rate for uninsured mortgages, the federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages, subject to review and periodic adjustment, which will be the greater of the borrower’s mortgage contract rate plus 2 per cent, or 5.25 per cent. This will apply to insured mortgages approved on June 1, 2021, or later.

 
OSFI has updated Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures.

Guideline B-20 Residential Mortgage Underwriting Practices and Procedures that affect Residential Real Estate are as follows.

A “residential mortgage” includes any loan to an individual that is secured by residential property (i.e., one to four unit dwellings). Home equity lines of credit (HELOCs), equity loans and other such products that use residential property as security are also covered by this Guideline.

Residential mortgage credit decisions and the underwriting process will be an assessment of:

1.The borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis

2.The borrower’s capacity to service their debt obligations on a timely basis

3. The underlying property value/collateral and management process (Principle 4).

These three principles should be evaluated by lenders using a holistic, risk-based approach – unless otherwise specified in this guidance. The borrower’s demonstrated willingness and capacity to service their debt obligations on a timely basis should be the primary basis of a lender’s credit decision. Undue reliance on collateral can pose challenges, as the process to obtain title to the underlying property security can be difficult for the borrower and costly to the lender.

The new guidelines also address the need for mortgage underwriting and purchasing to be supported by effective credit and counterparty risk management, including, where appropriate, mortgage insurance.

As the Canadian economy continues its shift into recovery following the impacts of the COVID-19 pandemic, additional economic and fiscal prudence on the part of government agencies is not unexpected.

CREA participated in the consultation and argued for a regionalized approach prior to implementation of this new qualifying rate for uninsured mortgages. The government’s response can be found in the annex from OSFI.

Both OFSI and Minister Freeland have indicated they will review the impact of the changes before the end of the year and adjust as necessary. We will independently monitor impacts in the resale housing market and continue to advocate on behalf of REALTORS® and their clients.

CREA is happy about the acknowledgement by the federal government that they need and are willing to work with provinces, territories, and municipalities to address the growing imbalance between supply and demand. REALTORS® have advocated for a supply-first approach in recent years, and the federal government has taken note.

When delivering their opening statement discussing the latest issue of the Bank of Canada’s Financial System Review, the Governor of the Bank of Canada, Tiff Macklem, reminded Canadians that “interest rates are unusually low” and that “borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates.”

Sources:

OSFI: https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b20_dft.aspx

CREA: https://news2me.crea.ca/2021/may-2021/government-announces-changes-to-the-qualifying-rates-for-mortgages/

Government of Canada: https://www.canada.ca/en/department-finance/news/2021/05/statement-by-the-deputy-prime-minister-and-minister-of-finance-on-the-canadian-housing-market.html