Most Canadians are now familiar with the fact that mortgage rules have been tightened 4 times in 4 years by the Department of Finance. What many don’t realize is that OSFI, the regulator of all Canadian Financial Institutions, is using its new found powers to tighten mortgage lending even further. It recently imposed a new set of rules for mortgage lenders that’s been titled B-20.
Perhaps the most restrictive component of B-20 is that it now restricts all non-conforming mortgages to a maximum of 65% of the value of the property unless the mortgage is insured though CMHC or Genworth. This creates a big challenge for Canada’s self-employed workers which at last count surpassed 2.6 million individuals. Typically, self-employed individuals require a lower net income to qualify for a mortgage since they use and write off portions of their homes and vehicles to run their businesses. The new rules imposed by B-20 make it so now some self-employed mortgagors will not qualify to purchase their home through a financial institution.
While our federally regulated financial institutions will have to decline these hard working Canadians, there are numerous alternative lenders now licking their chops. The mortgage repayment track records are excellent for these borrowers, but they will now have to get their mortgages from mortgage lenders who charge a significant risk premium. Receiving a risk premium when there’s no additional risk is a dream come true for any profit oriented mortgage company. Of course many self-employed workers will just opt out of homeownership rather than be fleeced by the new rules.
This is just another example of how tighter mortgage rules will exclude even more Canadians from the dream of home ownership. Fewer home owners, means fewer mortgages and fewer mortgages mean a lower debt to income ratio. It will help our government achieve its goal of reducing debt, but lower homeownership rates will not be good for the Canadian economy.