B-20 Backfire

Big-city home values were out of control. The real estate market needed de-risking.

But the solution policy-makers gave us (the B-20 mortgage guideline) was imperfect, very imperfect.

What’s About to Happen

Effective January 1, 2018, the banking regulator (OSFI) will force the vast majority of low-ratio mortgage applicants to prove they can afford a payment based on a rate that’s at least 2-point higher.

How Many Will Be Affected

On Thursday, Bank of Canada head Stephen Poloz said “about 10 per cent of (new) low-ratio mortgages—around 36,000 loans, representing about $15 billion worth of borrowing—would not have qualified last year under the new stress test.”

Disregard that 36,000. It drastically under-characterizes the overall impact.

The reality is:

  • Of Canada’s 5.93 million residential mortgages, over 4 in 5 are low ratio
  • Banks directly or indirectly fund more than 3 in 4 of those mortgages
  • The BoC says roughly 47% of outstanding mortgages may renew/reset in the next year
    • That is 2.7 million households, which seems high but these are the BoC’s numbers.
  • The BoC says 22% of low-ratio mortgagors are “highly indebted.”
    • Logically, most highly indebted mortgagors would also have high total debt service (TDS) ratios. That’s important because the new stress test will boost people’s debt ratios (for mortgage qualification purposes) by up to 5-7 percentage points. That, in turn, would disqualify most of these borrowers.

It boils down to this. The actual number of low-ratio borrowers affected in 2018 (including renewals, not just “new” mortgages) is likely closer to 1 in 6. Data from Mortgage Professionals Canada pegs it at 18%+.

What People Will Do

Mortgagors who can’t pass the new stress test won’t just give up. Buyers want new homes and refinancers want their money (equity).

So people affected by the stress test will do one or more of the following:

  • Take 30-year amortizations
    • …thus paying their mortgage off slower and staying in debt longer
  • Choose a more expensive, non-federally regulated lender
    • …thus staying in debt longer
  • Remain captive to their lender at maturity, paying notably higher renewal rates
    • …thus staying in debt longer
  • Select shorter and riskier mortgage terms to qualify for a bigger mortgage
    • …thus increasing their exposure to rate hikes
  • Leave debt that they can’t consolidate on high-interest credit cards, loans, credit lines or second mortgages
    • …thus staying in debt longer.

This is supposed to make the market safer.

Make no mistake, some home prices may drop for a while as B-20 trims demand (temporarily lowering debt ratios). But prices will eventually surge to new records once again, leaving indebted borrowers in a worse—less flexible—position than today.

Many Don’t Know What’s Coming

A recent RE/MAX-Leger survey found that 37% of Canadians aren’t aware of OSFI’s changes or how the rules will affect their ability to purchase a property in the future.

Of the 58% who are aware of the new rules:

  • 27% don’t believe it will impact the type of property they purchase in the future
  • 18% do believe it will impact the type of property they purchase in the future
  • 13% are unsure of how the new regulations will affect their ability to purchase a property

The Rush is On

“Since the OSFI regulation changes were announced, we have seen a number of markets across the country receive an influx of buyers looking to purchase a home before the rules take effect,” said Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada.

“Based on conversations with brokers, we also anticipate seeing some markets, such as Greater Vancouver and the Greater Toronto Area, seeing slower activity in the first part of the year as the market adjusts to the new regulations.”

Credit Union Positioning

Credit unions wouldn’t want you to think they’re ecstatic about B-20. But they are.

B-20 doesn’t directly apply to them. This is the credit union industry’s best chance to swipe market share from banks since the dawn of the World Wide Web.

But provincial watchdogs are warning CUs about being too cavalier with bank turn-downs. So CUs are containing their excitement and communicating to regulators that they’re going to be extra, extra, extra…..extra….cautious with mortgage applicants who can’t get approved at banks.

In practice, many CUs will keep qualifying creditworthy low-ratio 5-year fixed borrowers at the contract rate, as they’ve safely done for decades. They’ll simply charge higher interest rates to do it, and consumers will pay more.


  • Yolo says:

    Analysis seems incomplete. Typically the credit cycle begins to contract with tighter lending standards, increased regulation and higher interest rates. Don’t forget that the Banks and CUs have to securitize their loan book. This won’t happen if they continue to circumvent regulations. Private lending may fill the gap but only temporarily.

    • The Spy says:

      Yolo, Regarding credit contraction, refer to the sentence: “Some home prices may drop for a while as B-20 trims demand…”

      Regarding CUs “circumventing” regulations, which regulations would those be? OSFI’s rules are not written for CUs.

  • Tired of Know it Alls in Ottawa says:

    I could see the power hungry Evan Siddall and CMHC trying to force credit unions to comply with B-20 by taking away their securitization. If they do this I hope CMHC gets sued into the next decade in a credit union class action.

  • Peter M says:

    So in an effort to stabilize and strengthen the housing market, the government’s new rules are likely to increase amortizations, increase debtloads, take away refinancing options, and likely drive more borrowers to unregulated and alternative lending sources?

    This logic can only make sense in Ottawa’s political circles.

  • The Spy says:

    Rarely has a mortgage policy been introduced with more faulty assumptions than this one.