Residential Mortgage Underwriting Practices and Procedures Guideline (B-20)

Sound Mortgage Underwriting Contributes to Financial Stability

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.

History of the B-20 Guideline

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:

  • measures requiring financial institutions to apply greater rigor when assessing a borrower's ability to repay their mortgage loans, including when verifying a borrower's employment status and income history
  • a revised minimum qualifying rate (stress test) that requires lenders to confirm borrowers would be able to continue repaying their mortgage loans if faced with a sudden change to their circumstances (income loss, increased interest rates, additional expenses, etc.). The minimum qualifying rate is the greater of the contractual mortgage rate plus two per centage points, or the five-year benchmark rate published by the Bank of Canada
  • a requirement for lenders to place more scrutiny on property valuations, establish dynamic loan-to-value limits that reflect the risk of specific properties and markets, and update these limits and practices as housing markets and the economic environment evolve.

Mortgage Renewals

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.

B-20 Impact on Uninsured Mortgages

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.

  • The proportion of new uninsured mortgage loans that exceed 450 per cent of a borrower's income has declined, from a peak of 20 per cent.
  • However, OSFI has recently observed an uptick in mortgage approvals for highly indebted borrowers, seeing a rise from 14 per cent to 17.5 per cent in 2019. This increase has been partially supported by a decline in mortgage rates. OSFI will monitor this area closely. (See Chart 1)
Text version - Chart 1
Loan to income greater than 450%
DateTotal
2014 Q112.3%
2014 Q211.9%
2014 Q313.2%
2014 Q413.6%
2015 Q114.0%
2015 Q215.6%
2015 Q316.9%
2015 Q416.7%
2016 Q116.8%
2016 Q216.9%
2016 Q318.3%
2016 Q418.6%
2017 Q119.3%
2017 Q219.5%
2017 Q320.0%
2017 Q419.2%
REVISED B-20 BEGINS
2018 Q117.4%
2018 Q213.7%
2018 Q314.4%
2018 Q414.1%
2019 Q114.3%
2019 Q214.6%
2019 Q316.4%
2019 Q417.5%

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.

  • OSFI indicated it would be monitoring this closely, and data from OSFI regulated lenders shows that following the introduction of the revised guideline, the difference between renewal and new mortgage rates for uninsured five-year fixed and variable rate mortgages has remained largely unchanged. (See Chart 2)
  • The Financial Consumer Agency of Canada has some helpful tips for borrowers to consider when renewing a mortgage.
Text version - Chart 2
Renewal / new mortgage rate difference for five-year mortgages
DateSpread
2014 Q10.17%
2014 Q20.19%
2014 Q30.16%
2014 Q40.08%
2015 Q10.02%
2015 Q20.11%
2015 Q30.20%
2015 Q40.06%
2016 Q10.14%
2016 Q20.17%
2016 Q30.17%
2016 Q40.10%
2017 Q10.03%
2017 Q20.00%
2017 Q30.07%
2017 Q40.10%
REVISED B-20 BEGINS
2018 Q10.07%
2018 Q2-0.06%
2018 Q30.11%
2018 Q40.16%
2019 Q10.05%
2019 Q20.15%
2019 Q30.16%
2019 Q40.12%

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.

  • Uninsured mortgage borrowers do not appear to be extending amortization periods to pass the stress test requirement. (See Chart 3)
Text version - Chart 3
Mortgages with amortizations greater than 25 years
Date% >25 yrs
2014 Q154.8%
2014 Q252.6%
2014 Q355.0%
2014 Q456.5%
2015 Q156.9%
2015 Q258.0%
2015 Q360.6%
2015 Q461.5%
2016 Q163.1%
2016 Q264.0%
2016 Q365.5%
2016 Q466.0%
2017 Q156.6%
2017 Q250.7%
2017 Q351.6%
2017 Q451.5%
REVISED B-20 BEGINS
2018 Q151.6%
2018 Q246.0%
2018 Q348.3%
2018 Q451.3%
2019 Q151.3%
2019 Q248.5%
2019 Q349.8%
2019 Q451.9%

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.

Reviewing the Responsiveness of the Benchmark Rate

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.

  • For many years, the difference between the five-year posted rate and the average contract rates was about 200 basis points, which provided a healthy buffer.
  • Recently, the difference between the two has widened, making the benchmark less responsive to market changes than when it was first proposed. (See Chart 4)
  • OSFI is reviewing this specific aspect of the qualifying rate.
Text version - Chart 4
Benchmark rate -Average monthly contract rate (uninsured five-year fixed)
DateUninsured Spread - 5yr Fixed
07/01/2015171.9300312
14/01/2015171.9300312
21/01/2015171.9300312
28/01/2015171.9300312
04/02/2015184.2598621
11/02/2015184.2598621
18/02/2015184.2598621
25/02/2015179.2598621
04/03/2015186.8512053
11/03/2015186.8512053
18/03/2015186.8512053
25/03/2015186.8512053
01/04/2015196.660489
08/04/2015186.660489
15/04/2015186.660489
22/04/2015186.660489
29/04/2015186.660489
06/05/2015190.1080458
13/05/2015190.1080458
20/05/2015190.1080458
27/05/2015190.1080458
03/06/2015192.2343636
10/06/2015192.2343636
17/06/2015192.2343636
24/06/2015192.2343636
01/07/2015192.7185344
08/07/2015192.7185344
15/07/2015192.7185344
22/07/2015192.7185344
29/07/2015192.7185344
05/08/2015192.7577453
12/08/2015192.7577453
19/08/2015192.7577453
26/08/2015192.7577453
02/09/2015192.5760726
09/09/2015192.5760726
16/09/2015192.5760726
23/09/2015192.5760726
30/09/2015192.5760726
07/10/2015192.8840566
14/10/2015192.8840566
21/10/2015192.8840566
28/10/2015192.8840566
04/11/2015190.760523
11/11/2015190.760523
18/11/2015190.760523
25/11/2015190.760523
02/12/2015186.4267874
09/12/2015186.4267874
16/12/2015186.4267874
23/12/2015186.4267874
30/12/2015186.4267874
06/01/2016181.3774077
13/01/2016181.3774077
20/01/2016181.3774077
27/01/2016181.3774077
03/02/2016177.4923733
10/02/2016177.4923733
17/02/2016177.4923733
24/02/2016177.4923733
02/03/2016178.0829479
09/03/2016178.0829479
16/03/2016178.0829479
23/03/2016178.0829479
30/03/2016178.0829479
06/04/2016186.9021095
13/04/2016186.9021095
20/04/2016186.9021095
27/04/2016186.9021095
04/05/2016195.8579702
11/05/2016195.8579702
18/05/2016195.8579702
25/05/2016195.8579702
01/06/2016202.2405084
08/06/2016202.2405084
15/06/2016202.2405084
22/06/2016202.2405084
29/06/2016202.2405084
06/07/2016216.7045474
13/07/2016216.7045474
20/07/2016216.7045474
27/07/2016216.7045474
03/08/2016217.9191955
10/08/2016217.9191955
17/08/2016217.9191955
24/08/2016217.9191955
31/08/2016217.9191955
07/09/2016209.0655976
14/09/2016209.0655976
21/09/2016209.0655976
28/09/2016209.0655976
05/10/2016209.4266623
12/10/2016209.4266623
19/10/2016209.4266623
26/10/2016209.4266623
02/11/2016209.8584962
09/11/2016209.8584962
16/11/2016209.8584962
23/11/2016209.8584962
30/11/2016209.8584962
07/12/2016205.1901499
14/12/2016205.1901499
21/12/2016205.1901499
28/12/2016205.1901499
04/01/2017196.562162
11/01/2017196.562162
18/01/2017196.562162
25/01/2017196.562162
01/02/2017187.8474423
08/02/2017187.8474423
15/02/2017187.8474423
22/02/2017187.8474423
01/03/2017184.9396257
08/03/2017184.9396257
15/03/2017184.9396257
22/03/2017184.9396257
29/03/2017184.9396257
05/04/2017185.3520424
12/04/2017185.3520424
19/04/2017185.3520424
26/04/2017185.3520424
03/05/2017192.2023342
10/05/2017192.2023342
17/05/2017192.2023342
24/05/2017192.2023342
31/05/2017192.2023342
07/06/2017198.1855587
14/06/2017198.1855587
21/06/2017198.1855587
28/06/2017198.1855587
05/07/2017197.8448523
12/07/2017197.8448523
19/07/2017217.8448523
26/07/2017217.8448523
02/08/2017207.9717357
09/08/2017207.9717357
16/08/2017207.9717357
23/08/2017207.9717357
30/08/2017207.9717357
06/09/2017194.2649201
13/09/2017194.2649201
20/09/2017194.2649201
27/09/2017199.2649201
04/10/2017185.0232871
11/10/2017185.0232871
18/10/2017185.0232871
25/10/2017195.0232871
01/11/2017180.0831052
08/11/2017180.0831052
15/11/2017180.0831052
22/11/2017180.0831052
29/11/2017180.0831052
06/12/2017171.7762789
13/12/2017171.7762789
20/12/2017171.7762789
27/12/2017171.7762789
03/01/2018168.5204782
10/01/2018168.5204782
17/01/2018183.5204782
24/01/2018183.5204782
31/01/2018183.5204782
07/02/2018179.2563184
14/02/2018179.2563184
21/02/2018179.2563184
28/02/2018179.2563184
07/03/2018174.9155456
14/03/2018174.9155456
21/03/2018174.9155456
28/03/2018174.9155456
04/04/2018172.7072851
11/04/2018172.7072851
18/04/2018172.7072851
25/04/2018172.7072851
02/05/2018169.68432
09/05/2018189.68432
16/05/2018189.68432
23/05/2018189.68432
30/05/2018189.68432
06/06/2018186.8747797
13/06/2018186.8747797
20/06/2018186.8747797
27/06/2018186.8747797
04/07/2018183.9820461
11/07/2018183.9820461
18/07/2018183.9820461
25/07/2018183.9820461
01/08/2018178.8234384
08/08/2018178.8234384
15/08/2018178.8234384
22/08/2018178.8234384
29/08/2018178.8234384
05/09/2018175.607789
12/09/2018175.607789
19/09/2018175.607789
26/09/2018175.607789
03/10/2018173.7219379
10/10/2018173.7219379
17/10/2018173.7219379
24/10/2018173.7219379
31/10/2018173.7219379
07/11/2018167.9406171
14/11/2018167.9406171
21/11/2018167.9406171
28/11/2018167.9406171
05/12/2018161.1002715
12/12/2018161.1002715
19/12/2018161.1002715
26/12/2018161.1002715
02/01/2019157.8893004
09/01/2019157.8893004
16/01/2019157.8893004
23/01/2019157.8893004
30/01/2019157.8893004
06/02/2019164.1075832
13/02/2019164.1075832
20/02/2019164.1075832
27/02/2019164.1075832
06/03/2019172.5480027
13/03/2019172.5480027
20/03/2019172.5480027
27/03/2019172.5480027
03/04/2019192.133567
10/04/2019192.133567
17/04/2019192.133567
24/04/2019192.133567
01/05/2019207.2196797
08/05/2019207.2196797
15/05/2019207.2196797
22/05/2019207.2196797
29/05/2019207.2196797
05/06/2019221.9099549
12/06/2019221.9099549
19/06/2019221.9099549
26/06/2019221.9099549
03/07/2019236.62488
10/07/2019236.62488
17/07/2019221.62488
24/07/2019221.62488
31/07/2019221.62488
07/08/2019228.2140467
14/08/2019228.2140467
21/08/2019228.2140467
28/08/2019228.2140467
04/09/2019234.7669285
11/09/2019234.7669285
18/09/2019234.7669285
25/09/2019234.7669285
02/10/2019233.1624177
09/10/2019233.1624177
16/10/2019233.1624177
23/10/2019233.1624177
30/10/2019233.1624177
06/11/2019231.5552908
13/11/2019231.5552908
20/11/2019231.5552908
27/11/2019231.5552908

Associated Links

Guideline B-20: Residential Mortgage Underwriting Practices and Procedures

Speech: Sound Mortgage Underwriting: Foundation for Stability