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    OSFI Consults on Minimum Qualifying Rate for Uninsured Mortgages

    April 13, 2021

    OSFI is proposing new minimum qualifying rate for uninsured mortgages under the Guideline B-20. The proposal for the qualifying rate for uninsured mortgages is the higher of the mortgage contract rate plus 2.00% or 5.25% as a minimum floor. OSFI also announced a proposal to revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment. Additionally, OSFI published a set of frequently asked questions (FAQs) on this consultation. The comment period on the proposal ends on May 07, 2021. OSFI will communicate final amendments to the qualifying rate for uninsured mortgages in Guideline B-20 by May 24, 2021, with a coming into force date of June 01, 2021.

    In early 2020, OSFI had initiated a consultation process on the benchmark for the qualifying rate for uninsured mortgages contained in Guideline B-20 titled "Residential Mortgage Underwriting Practices and Procedures." OSFI had suspended this consultation in March 2020 due to the COVID-19 pandemic. OSFI has now issued a letter to relaunch the policy work on the qualifying rate with a new proposal and to reinforce the principles of sound mortgage underwriting in Guideline B-20, in light of the current economic environment. Guideline B-20 sets out the OSFI expectations for prudent residential mortgage underwriting, and is applicable to all federally-regulated financial institutions that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. 

    The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances, such as the reduction of income or a rise in mortgage interest rates. Based on the OSFI analysis, this change in the qualifying rate would result in a reduction in the mortgage loan amount between 2% and 4%, holding the amortization steady. Also, while most borrowers will have a new qualifying rate that is higher than the rate they would have previously qualified under, OSFI estimated that up to 10% of borrowers would have exceeded individual bank’s Total Debt Service ratio thresholds. As mortgages are one of the largest exposures that most banks carry, ensuring that borrowers are able to repay their loans strongly contributes to the continued safety and soundness of financial system in Canada. Given the current risk environment, OSFI will be looking for heightened vigilance from federally regulated lenders in applying the principles of Guideline B-20 related to collateral management, income verification and debt servicing, combined Mortgage-HELOC [Home Equity Lines of Credit] loan plans, and risk governance.

     

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    Comment Due Date: May 07, 2021

    Effective Date: June 01, 2021

    Keywords: Americas, Canada, Banking, Uninsured Mortgages, RRE, CRE, Mortgage Lending, Minimum Qualifying Rate, Guideline B-20, Credit Risk, FAQ, OSFI

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