Tighter rules governing lending practices have resulted in 20% fewer mortgages being approved by Canada’s big banks, say mortgage brokers.
According to several brokers interviewed in recent weeks, a new stress test for home buyers who don’t need mortgage insurance that has been imposed by Canada’s banking regulator has put a damper on the number of mortgages being issued by the country`s big banks at the start of 2018.
As a result, alternative lenders are seeing an uptick in business as brokers’ increasingly direct would be home buyers toward borrowing options that are beyond the reach of the Office of the Superintendent of Financial Institutions’ (OSFI) tighter lending requirements.
Clients who don’t meet the bar are turning to private lenders, mortgage investment corporations and credit unions to secure the funding needed to purchase a home, which are provincially regulated and not required to implement the federal stress test, said Carmen Campagnaro, President of Pro Funds Mortgages.
Mr. Campagnaro is one of several mortgage brokers who says that rejected loan applications to traditional lenders have risen about 20% since January 1 of this year, when OSFI mandated a new stress test for uninsured borrowers, or those who have more than a 20% down payment.
Private lender Fisgard Asset Management Corporation in Victoria is seeing an influx of borrowers and “better quality business” said Hali Noble, its Senior Vice-President of residential mortgage investments and broker relations. “A lot of these people should be bankable, but they’re not.”
The guidelines, known as B20, are aimed at curbing risky lending amid rising household indebtedness and high home prices in some markets. In order to get a loan from a federally regulated lender, home buyers have to prove that they can service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage point or the five-year benchmark rate published by the Bank of Canada.
Superintendent Jeremy Rudin has said OSFI is aware the stricter rules could have unintended consequences, such as sending borrowers towards more risky lenders that are out of the regulator’s purview.
“We can’t control what we can’t control,” said Mr. Rudin last October. “Our mandate is focused on the safety and soundness of the federally regulated institutions… It isn’t something that we favour but it isn’t something that we have an authority to prevent.”
Since the revised mortgage guidelines came into force, the Bank of Canada’s benchmark interest rate has risen, dealing a “double extra whammy” to borrowers, said Dave Teixeira, Vice- President of Operations for Dominion Lending Centres.
“Normally, we would see our volume going to the big banks and monolines, and now we’re seeing a little bit more of that, roughly up to 20%… moving over to credit unions.”