The pressure is on – mortgage hopefuls find themselves under increased scrutiny as new rules push lenders and insurers to look deeper into their income requirements and assets.
The Office of the Superintendent of Financial Institutions (OSFI) announced on November 6 the finalized iteration of its proposed B-21 regulations, a guideline to minimize the risk taken on by mortgage insurers.
Also read: How Will OSFI B-21 Impact You?>
The final draft of the regulations, which have been open for public review since April, introduce some stricter standards for mortgage lenders and their assessment of borrowers. To compliment these new regulations, OSFI has also tweaked parts of its existing B-20 policy, which are in place to minimize the amount of high-risk debt taken on by mortgage borrowers.
Those regulations, which were first introduced in 2012, are notorious for cutting the minimum amortization for insured mortgages to 25 years, limiting HELOC amounts to 60 per cent, and enforcing new debt-ratio requirements for mortgage applicants. In short: they made it a lot harder for some buyers to break into the market. This new round of changes won’t have the same drastic impact, but they will force some applicants to clean up their finances before applying for a mortgage.
What Has Been Introduced?
To understand the changes, it’s important to know the purpose of each of these policies; B-20 regulates the banks and mortgage borrowers directly, while B-21 targets mortgage insurers, and their role in enforcing good lending habits among banks that provide mortgages.
Under B-21, mortgage lenders must now:
Amp Up Income Verification: It is the responsibility of the lender to ensure a mortgage borrower has a qualifying source of income, and that they have the capacity to repay their mortgage loan. This means the lender must confirm the employment status and income history of the borrower. Lenders must go one step further with self-employed borrowers to verify:
The income amount is verified by an independent source;
The verification source is difficult to falsify;
The verification source directly addresses the amount of the declared income; and
- The income verification information/documentation does not contradict other information provided by the borrower in the underwriting process.
Look Beyond Credit Score: While lenders must look to a borrower’s income and history with paying back debt, B-21 is pushing them to review “factors that would not ordinarily be captured by debt serviceability metrics”, such as savings, assets, living expenses and recurring payment obligations like condo fees or auto financing.
While it makes sense to ensure borrowers are on stable financial ground, this could further put the squeeze on first-time buyers, who may be utilizing the entirety of their savings to break into the market.
Income assessments will also look to the stability of the borrowers income including “possible negative outcomes (e.g., variability in the salary/wages of the borrower). Conversely, temporarily high incomes (e.g., overtime wages, irregular commissions and bonuses) should be suitably normalized or discounted.”
Clarify the Use of Cashback: OSFI has taken the opportunity to clear up its stance on cash back mortgages, which were thought to be on B-20’s original chopping block. This mortgage feature, which allows borrowers to receive a cash rebate after qualifying for their mortgage, can remain in lenders’ arsenals; however, borrowers cannot put the funds to use toward their down payments.
Double Check Their Work: B-21 tasks mortgage insurers with keeping a close eye on lenders’ assessment and qualification practices, especially in the case of lenders with a higher level of mortgage defaults. Essentially, insurers are to take stricter measures when approving coverage for high-ratio mortgages, and encouraged to review how the lender has assessed such borrowers before giving the green light. As a borrower paying less than 20 per cent down, this means you’re under the microscope twice; first under the eyes of your mortgage issuer, and then the insurer granting the go-ahead for your higher-risk mortgage.