Mortgage brokers have warned that the borrower rejection rate from large banks and traditional monoline mortgage lenders has gone up by as much as 20% after Canada’s banking regulator imposed a new stress test for home buyers who don’t need mortgage insurance.
As a result, alternative lenders are seeing an uptick in business as brokers increasingly direct home buyers toward borrowing options that are beyond the reach of the Office of the Superintendent of Financial Institutions’ newly enacted tighter lending requirements.
Clients who don’t meet the bar are turning to private lenders, mortgage investment corporations (MICs), and credit unions, which are provincially regulated and not required to implement the stress test, according to Carmen Campagnaro, president of Pro Funds Mortgages in Burlington, Ontario.
Campagnaro is one of the brokers who said rejected loan applications to traditional lenders have risen by 20% since January 1, when OSFI mandated a new stress test for uninsured borrowers, or those who have more than a 20% down payment.
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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,” Noble told The Canadian Press. “But they’re not.”
The B20 guidelines 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. An existing stress test already requires those with insured mortgages to qualify at the Bank of Canada benchmark five-year mortgage rule.
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,” he explained back in 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, both the Bank of Canada of rate and benchmark rate has risen, dealing a “double extra whammy” to borrowers, according to Dave Teixeira, vice president of operations, public relations and communications for Dominion Lending Centres
Dominion mortgage brokers are seeing a higher rate of rejection and clients have to submit multiple applications to various institutions before finding a lender that works, he added.
In turn, their brokers are submitting 80% more applications than last year, Teixeira said.
“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 per cent… moving over to credit unions.”
The full report can be viewed here.
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