Office of the Superintendent of Financial Institutions
The safety and stability of federally regulated financial institutions is fundamental to the ongoing health of Canada's financial system and its economy. OSFI contributes to this stability by fulfilling its mandate to protect the interests of depositors and other creditors of financial institutions. It does this by setting standards that improve banks' resilience, both under normal conditions and in the event of a financial downturn.
Lenders subject to OSFI supervision hold nearly 80 per cent of all residential mortgages issued in Canada, and residential mortgage loans account for almost 30 per cent of the total assets held by these lenders. Sound mortgage underwriting practices reduce risks to the financial system, and to Canadians who entrust their savings to Canada's financial institutions.
Sound mortgage underwriting practices require lenders to assess a borrower's ability to pay their loan under a variety of conditions. A lender should consider potential changes to a borrower's income and expenses, as well as changes to the market environment, including the valuation of the property that is being mortgaged.
In 2012, OSFI introduced its Residential Mortgage Underwriting Practices and Procedures Guideline (Guideline B-20) to set out expectations for strong residential mortgage underwriting by federally regulated lenders. The original guideline was mostly principles-based and included an expectation that lenders would stress test borrowers for adverse conditions.
In 2016, OSFI reminded lenders of its underwriting expectations in the form of a
public letter. When OSFI continued to see examples of relaxed mortgage underwriting at some lenders, it issued an update to B-20 in 2017 that came into effect in January 2018.
The updated B-20 clarified and strengthened expectations to address what OSFI saw as increasing risks in an environment of historically low interest rates, high levels of consumer debt and housing imbalances.
The revised Guideline B-20 includes:
The application of B-20 to mortgage renewals has remained consistent since the introduction of the guideline in 2012. When a mortgage renews, the existing lender typically does not re-underwrite the loan as long as the borrower is current with their payments. As the lender is also expected to periodically update its risk analysis throughout the life of the loan, OSFI sees this as a reasonable practice and does not require the re-underwriting of existing mortgages when they come up for renewal.
If a borrower decides to change lenders, the new lender must act responsibly by following their own established underwriting standards. Business models and risk tolerances are different across lenders; it is not responsible for lenders to rely on the past underwriting standards of another lender.
The following data represents uninsured mortgages from the top 19 federally regulated mortgage lenders. These lenders hold more than 95 per cent of all mortgages subject to OSFI regulation and supervision. Charts 1-3 below include 2019 Q4 data from October and November. Updates will be made once December 2019 data becomes available.
Mortgage underwriting quality warrants attention:
Since the B-20 revisions were put in place, lenders are approving fewer mortgages for the most highly indebted or over-leveraged borrowers.
Rates at renewal are stable:
Concerns have been raised that the stress test could limit a borrower's ability to obtain competitive rates at renewal.
Amortization periods not extending:
Insured mortgages have a maximum amortization period of 25 years, while uninsured mortgages subject to B-20 can be paid over a longer period.
The revisions to B-20 are working, strengthening mortgage underwriting across Canada and improving the resilience of the Canadian financial system to future shocks. While improvements have been made OSFI will continue to monitor lender practices, particularly in the area of income verification, and will be proactive with lenders when it identifies areas requiring attention.
Under B-20, the minimum qualifying rate for uninsured mortgages is calculated using the greater of the contractual mortgage rate plus 200 basis points (2 per cent), or the five-year benchmark rate published by the Bank of Canada. OSFI is confident that the contract rate plus 200 basis points is a reasonable measure to qualify a borrower. This will remain a key part of OSFI's guideline B-20.
The benchmark rate is based on the posted rates from the big six banks in Canada, and is intended to serve as a responsive floor for the qualifying rate.
Guideline B-20: Residential Mortgage Underwriting Practices and Procedures
Speech: Sound Mortgage Underwriting: Foundation for Stability