While there is little news to report on the economic front, the all-dreaded B-20 underwriting guidelines proposed by the Office of the Superintendent of Financial Institutions (OSFI) kicks in today (Nov 1st). For the average borrower, it will mean nothing changes. But, there are a few points worth noting.
The first one is that home equity lines of credit (HELOC) have now been limited to a maximum loan-to-value of 65%. They can still be registered at 80%, but the re-advanceable portion cannot exceed 65% and the other 15% must be amortizing. An unfortunate change as lines of credit are often used for investment purposes like the Smith Manoeuvre, buying investment properties or injecting funds into a (new) business.
Secondly, institutions under the supervision of OFSI can no longer offer 100% financing, or better known as, 5% cash back mortgages. This rule was originally changed in one of the previous rounds of government announcements to forbid 100% financing in its strictest sense. When that happened, some lenders took it upon themselves to offer a 5% cash back that could then be used as a down payment, effectively providing 100% financing. This was a great work around, but the clients ended up paying a significantly higher rate in order to do this and if they broke the mortgage early, they had to repay the prorated portion of the cash back. OFSI has now disallowed this practice so their lenders cannot offer any type of mortgage that would equate to the client being 100% financed. They want to see that the client has some skin in the game, whether through their own resources or a gift.
Lastly, the third major change and probably the one that will have the greatest impact is the requirement that all variable rate mortgages and mortgages with a term less than 5 years, must now be qualified using the mortgage qualifying rate or contract rate, whichever is higher. That rate is currently 5.24%, which is significantly higher than current market rates for 1-4 year terms. This will certainly discourage buyers, especially first time buyers, from going with a term less than 5 years and it also makes qualifying for a variable rate mortgage that much harder.
You may be thinking that you thought this rule was already in place, and you’re correct. It is, in place, but it only applied to high ratio, or CMHC mortgages. The new rules now also extend to conventional, or non-CMHC mortgages. So whether you have 5% down, or 50% down, this rule will apply universally to everyone. Although variable rate mortgages aren’t en vogue right now, when they do come back into the spotlight, it will make it a little harder for some borrowers to qualify. That’s where I see the biggest bite coming from.
What is also surprising is that these rules don’t apply to all institutions, and not at the same time. The guidelines state that these rules must be implemented by a lender by the end of their fiscal year. For most lenders, and every bank, this is October 31st. So effective today, all these lenders have to play by the new B-20 underwriting guidelines. Where this gets interesting is that lenders like ING that have a December 31st year end have an extra couple months to play under the old rules. This could help them pad their year-end results as I’m sure it will mean an influx of business that would otherwise get sent elsewhere before the rule change. Great timing since they just launched a HELOC product earlier this year.
The other interesting point with all of this is that credit unions are not under the oversight of OFSI so these rule changes do not apply to them. Therefore, we still have some lenders that can offer the 5% cash back product and lines of credit to 80%. It also means they can offer variable rate mortgages and qualify borrowers at lower rates like was traditionally done before these rules came into force.
BEST RATES: 1 yr 2.65 – 3 yr 2.79 – 5 yr 2.94 – VRM 2.65
Lee Welbanks is a Mortgage Broker with Welbanks Financial Group, reach out to him if you have any questions about these changes and how they affect you. Heard about our awesome new home search tool? We’ve opened up the MLS just for you. Make sure you login to our custom Spring Realty Homefinder Tool and give it a spin! Find us on Facebook and Twitter too!