New Mortgage Rule Set

Canada's top banking regulator has published the final version of its new mortgage rules, which include a requirement to "stress test" borrowers with uninsured loans to ensure they could withstand higher interest rates. The new guidelines for the mortgage industry will come into effect on January 1st, 2018.

Among the major new rules is a requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo such a test. By law, borrowers with a down payment of under 20 percent for a home must purchase mortgage insurance. Borrowers pay an insurance premium, but the beneficiary is actually the lender, because the insurance protects the loan giver in the event the borrower defaults on the loan. 

                                                                                                                                  Courtesy of BNN

                                                                                                                                Courtesy of BNN

The stress test is designed to simulate a borrower's financial situation by assuming they would have to pay back the loan at the posted average - not whatever deal they were able to negotiate. So under OSFI's new rules, borrowers would be stress tested at either the five-year average posted rate, or two percent higher than their actual mortgage rate - whichever one is higher. 

On a $500,000 home with a $50,000 down payment, the CMHC says a borrower would be charged an extra $13,950 go insure the $450,000 mortgage. In addition to the stress test, the new rules would require lenders to have more scrutiny around the loan-to-value ratio of the loans they give out, to ensure they are not giving out mortgages that are too large compared to the underlying value of the home. 

There's also new limitations on so-called co-lending or bundled mortgages that aim to ensure lenders don't flout rules deigned to limit how much they can lend.

- Courtesy of CBC News