The Office of the Superintendent of Financial Institutions Canada (“OSFI”), which regulates federally regulated financial institutions, recently announced new mortgage underwriting guidelines (the “New Guidelines”) which become effective January 1, 2018.

The most notable change in the New Guidelines is a “stress test” for borrowers making a down payment of 20 per cent or more of the house’s value (known as “uninsured mortgages”).

Previously, the stress test only applied to insured mortgages where the buyers have down payments of less than 20 per cent. The New Guidelines will now require buyers with uninsured mortgages to prove they can afford their mortgage payments based on either the Bank of Canada’s five-year benchmark rate (4.89% as of October 18, 2017) or their contract mortgage rate plus two percentage points, whichever is higher.

The New Guidelines will have a dramatic effect on a buyer’s ability to purchase a house.

It is estimated that a family earning $100,000 annually can currently afford a home worth $706,692 by making a 20 per cent down payment on a five-year fixed rate of 3.09 per cent amortized over 25 years. Under the New Guidelines, that family would only be able to afford a $559,896 home.

In certain situations, buyers who can afford uninsured mortgages will be able to avoid being put under the new stress test.

For example, anyone who purchases their house prior to January 1, 2018 will not be subjected to the new stress test. Further, OSFI is not mandating that lenders use the new stress test when current borrowers renew their mortgages with the same lender, although they may choose to. Finally, provincially regulated financial institutions, such as credit unions, may choose to disregard the New Guidelines, allowing buyers to obtain a mortgage based on their ability to afford the mortgage at the contractual interest rates and not the higher stress test rates.

Other notable changes in the New Guidelines include:

  • Federally regulated lenders must establish and adhere to appropriate loan-to-value ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve; and
  • Federally regulated lenders are prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum loan-to-value ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.