04 Jul B20 Guidelines
Since the new federal B20 guidelines came into effect on Jan. 1 of 2018, Canada’s borrowers are seeing big changes. The Borrower Rejection rate from large banks and traditional mortgage lenders has increased as much as 20 per cent after the new stress test was implemented; a way to prove that you would be in a good financial state if interest rates were to rise.
As a result of these new guidelines, alternative lenders are seeing a higher demand in business; as they are outside of the grasp of the Office of the Superintendent of Financial Institutions’ new lending requirements. Citizens who do not meet the requirements are turning to private lenders, mortgage investment corporations (MICs), and credit unions which are provincially regulated and do not require the implementation of the stress test. With these new strict guidelines, it is no surprise that Canadians are turning to alternative lending options.
The B20 guidelines do have a specific goal, and that is to curb risky lending. To get a loan from a federally regulated lender, you must prove that you can afford the uninsured mortgage at the greater contractual mortgage rate plus two per cent, or the five-year benchmark rate published by the Bank of Canada. For insured buyers, a stress test currently exists where they must qualify at the Bank of Canada’s five-year mortgage benchmark.
When seeking out mortgage options, make sure to read all terms and conditions of the contract. If you see a “sale-only clause”, the only way to get out of your mortgage is to sell your home. If you are put under stress due to these new guidelines and higher rates from alternative lenders, there are solutions available. Look for an open mortgage, where you prepay any amount at any time without charges or limits. Alternative mortgages exist, such as bad credit mortgages, private mortgage loans, and second mortgage loans. Just watch out for collateral mortgages. While you may have higher interest, there is more flexibility; ensuring you a greater chance of success in owning your home.