B20? Is that some kind of vitamin?
It certainly sounds like a vitamin, but unfortunately, it is something else altogether. The Office of the Superintendent of Financial Institutions is the regulator for all federal mortgage lending institutions. They set the regulations for mortgage companies like banks to follow (or ignore). The latest updates to the B20 mortgage regulations could bring some potentially very disrupting changes to the real estate market, especially if you are wanting to get a mortgage in Vancouver, or you are a mortgage broker in Vancouver. In summary:
- Mortgage borrowers will need to qualify for a mortgage using a rate that is the greater of the 5 year benchmark rate or the contract rate +2%. For example, if you were looking at a mortgage at 3.09%, you would need to qualify as if you were getting a mortgage at 5.09%. Last year, the changes only applied to borrowers with less than 20% down-payment. This year, the change applies regardless of how much down-payment you have.
- There is a vague condition regarding being more stringent on assessing loan-to-value ratios depending on the risk of the loan.
- Mortgage lenders cannot try to bundle first and second mortgages in order to get larger loan amounts for borrowers. I, as a mortgage broker, can still arrange first and second mortgages together in the same manner, but the mortgage company cannot do it themselves like they have been previously able to.
What affect will this have on the Vancouver real estate market?
Most of the real estate markets in Canada will not see their markets impacted greatly from these changes, Vancouver, however is by far the most expensive real estate market in Canada. The first-mentioned change is going to have the greatest impact. With the announced change, mortgage borrowers with more than 20% down-payment will see their pre-approvals decreased by 15-20% starting on January 1. Due to the 2016 changes, borrowers with less than 20% down will not have their approvals affected to the same extent, as the biggest part of this change has been implemented already.
Based on what happened last year with insured mortgages, I believe that we have some idea of what will happen this coming year in Vancouver. What happened this year?
- Housing prices increased overall at a moderate pace.
- The detached housing market cooled down, and the strata (condo and townhouse) markets got hot.
- The Fraser Valley real estate market also got hot.
In essence, mortgage borrowers were pushed down in the market, and they were pushed out in the market to further away, less pricey markets than Vancouver. Borrowers that could afford a house before would settle for townhouses or condos, or they would stay out of the market.
Insured mortgages, according to my sources, comprise approximately 25% of all mortgages in Canada. The impact of this past year impacted only 1/4 of mortgages arranged, and it had a significant impact on the market. This new change will affect 75% of all mortgages arranged in Canada, provided that the historical statistics remain consistent in the future.
In my opinion, in regions other than Greater Vancouver and Greater Toronto, I don’t believe the effect of these changes will be as significant. There are many places in Canada where someone can buy a detached house for the same price that would be a stretch to buy a 1 bedroom condo in Surrey. This will mean that a family with two reasonable incomes can afford to buy a house. This change could be devastating to the Vancouver real estate market. But even that isn’t the full story.
Last March, I was at a dinner with Dong Lee, the President of Mortgage Architects. I was asking him about the changes to the qualifications for insured mortgages and how it has impacted business, and he told me the region hardest by those changes was Atlantic Canada. So despite my suspicion that Vancouver will be the hardest hit market by these changes, it could be far more widespread.
I wrote this blog post so long that I have decided to split it into two separate posts. Stay tuned to my page for the thrilling conclusion, including recommendations for this market.