No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.
The effects of these guidelines are visible already. A host of lenders have announced stricter rules on things like conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages. Albeit, some implemented these changes well ahead of today.
In essence, it is now tougher for many borrowers to get mortgage financing.
The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.
One prime example is First National, Canada’s biggest non-bank lender. It has adopted OSFI’s low-ratio qualification policy on variable and 1- to 4-year fixed mortgages with 20% or more equity. That requires it to analyze a borrower’s debt ratios using the Bank of Canada’s 5-year posted rate (which is usually a much higher rate than the actual contract rate).
(This is generally a sound guideline. It helps protect unsuspecting borrowers from the risk of higher rates. In the past, many lenders used rates like their 3-year discounted rate to qualify conventional mortgages with variable, 1-, 2-, 3- or 4-year terms.)
Like most non-bank lenders, First National relies in part on OSFI-regulated institutions to fund its mortgages. Those institutions now require compliance with B-20, and First National has little practical choice but to go with the flow.
And it’s not alone. Most monoline lenders are in the same boat.
We spoke with a treasury executive at one lender earlier today. He told us:
“My view is that all non-bank lenders other than credit unions will be subject to B-20, it’s just a matter of time.”
“All other lenders are selling loans to federally regulated financial institutions (FFRIs), either on the FI’s balance sheet or through the Canada Mortgage Bond (CMB) program. Those lenders would all be subject to B-20.”
(He added that “every one of them” will eventually use the 5-year Bank of Canada benchmark rate to qualify variable and 1- to 4-year conventional mortgages.)
In short, OSFI guidelines will rule the day for any bank, trust or lender that gets funding from a bank or trust.
As you read above, however, credit unions (CU) are not federally regulated (see OSFI Rules Spell Opportunity for Some Credit Unions). That means CUs have more flexibility when approving a mortgage. That flexibility will continue as long as:
(a) provincial regulators don’t impose new OSFI-style guidelines
(b) a CU doesn’t accept funding from an OSFI-regulated source, and
(C) a CU doesn’t apply for a federal charter.
Due to B-20, CUs have now become the last bastion of common sense lending in the prime mortgage market. Take Meridian Credit Union, for example, one of Canada’s biggest credit unions. Meridian still uses the actual mortgage rate to qualify 1-4 year conventional mortgages. And there are various other CUs that do the same.
In most cases, we would never advise a borrower to not assume higher rates in the future. But in limited circumstances, that extra borrowing power is appropriate for a well-qualified borrower with good equity, good employment, good credit and either a short holding period or higher near-term income expectations.
Instead of conforming to a rigid box, Meridian and many other credit unions use old-fashioned good judgment. This allows for flexibility where needed, without taking unnecessary risks. Meridian says there are no plans to change its qualification rate on conventional mortgages.
By contrast, most lenders under OSFI rules will be more black or white: You’re either in their credit box, or you’re not. Exceptions to these rules will be more limited than ever before.
Sidebar: Here’s a partial list of other OSFI-inspired changes occurring across the mortgage market:
- Tighter debt ratios on uninsured non-prime mortgages (some “B” Lenders have never even published debt ratio guidelines before today)
- Stricter proof of income for self-employed borrowers with more than 20% down (i.e., more evidence that an applicant’s business can afford to pay the salary being stated by that borrower—business and personal bank statements, for example.)
- Stricter guidelines for calculating a borrower’s minimum monthly payment on unsecured debt (This payment affects a borrower’s debt ratios. Three per cent of the outstanding balance has long been a standard, but several lenders used more flexible guidelines.)
- Stricter policies for estimating heating cost, which is also used in debt ratio calculations
- The end of cash-back down payment mortgages (at all lenders except credit unions)
- The end of borrowed down payments (at some lenders).
Many of these changes are sound, but all of them (combined) will curtail housing demand and/or affordability for some period of time. That means medium-term housing pain for the hope of long-term economic gain.
Rob McLister, CMT
Last modified: May 24, 2022
Rob, Please clarify:
Is it “Stricter proof of income for self-employed borrowers with more than 20% down?”, or “Stricter proof of income for self-employed borrowers with less than 20% down”
Thanks for posting this Rob. Very informative as usual.
Great job (again)
Good article Rob. Think “B” Day may take on a whole new meaning [and won’t be as fondly remembered].
Hi Mohamed,
That comment references conventional mortgages (those with 20% or more equity). In fact, stated income underwriting in general has become more strict, but many folks were already aware of the tightening on insured stated income mortgages.
Cheers….And thanks to everyone below for the kind feedback! -Rob
Except if you are a new buyer with a good downpayment and verifiable income. Just lovin’ it. Just waitin’
Agreed. Just catch a good rate too. Remember banks and bond traders don’t always sync with the BoC.
Thanks for the article Rob, a good comparison of the larger banks and lenders versus the differences the credit unions can offer.
But if rates go up in this environment price drops will, at the very least, make it a wash.
Prices don’t HAVE to drop if rates go up, at least not dollar for dollar. It depends how high rates go and on what happens to employment, wages and other supply-demand inputs.
Agreed but that’s why I said “in this environment” which ain’t pretty.
Rates probably wouldn’t go up unless the economy was doing much better.
If the economy is doing better then more people have jobs at higher wages. If more people have better jobs then home demand is greater, in which case home prices may not go down as much as you think.